Strategies for Small and Medium-Sized U.S.

Businesses Interested in Investing in China: Lessons That Can Be Learned from Taiwanese Companies

Xun Wang Department of Sociology/Anthropology University of Wisconsin -Parkside

David A. Ralston Management Department Michael F. Price College of Business University of Oklahoma

Investing in China has been one of the hottest and most critical issues in the ever-changing business world since the early 1980s. Huge amounts of foreign investment poured into China during this period primarily because of China's huge market, plentiful cheap labor, and rapid economic development (Davies, 1998; Luo, 1998; Shi, 1998; Sun & Tipton, 1998; Wang & Ralston, 1995). From 1980 to 1988, the number of foreign-joint ventures approved in China increased from 348 to 15,955, and the amount of foreign capital

pledged increased from $1.7 million to $28.2 million (Pomfret, 1991). The foreign investment in China totaled $27.5 in 1993 and that amount rose to $37.5 billion by 1995. At present, there are over 318,000 foreign funded companies in China with the total amount of realized foreign investment from 1978 to 1998 totaling $250 billion (Shi, 1998). While the interest in investing in China is worldwide, two major investors are the U.S and Taiwan (Pomfret, 1991; Shi, 1998; Sun & Tipton, 1998; Walker, 1996; Wang & Ralston, 1995;). What is also interesting to note is that while almost all U.S. companies investing in China are large multinational corporat ions, many of the investors from Taiwan are small and medium-sized companies (Business Week , March 29, 1993; Wang and Ralston, 1995; Xu, 1996). U.S. small and medium-sized businesses seem uncertain about investing in China or, more likely, they are uncertain about how to invest in China. Is the Chinese market profitable or just a peril? This is a question that the Washington Post found on the minds of many small to medium-sized U.S. investors (The Washington Post , January 30, 1994). If it can prove to be p rofitable, how can the smaller and medium-sized players get into the game? How can small and medium-sized U.S. businesses learn the "secrets" of doing business in China? It is unlikely that they can learn from large U.S. multinational corporations [MNCs] because a primary strategy of the U.S. MNCs is to use their deep pockets to support years of lost revenue while waiting for the operation to turn profitable. Coca-Cola and McDonalds are prime examples (Prystay, 1996). On the other hand, according to Gunther Rexrodt (United Daily, April 4, 1994), the German Minister of Economics: Taiwanese experience in investing in China can be a good example for German small and medium-sized businesses. Taiwanese companies are more successful

than other countries' investors to form a joint venture in China. Their operational skills and marketing strategies can provide German companies a good reference. In fact, it is reported that the small and medium-sized Taiwanese investors are doing better than those of other countries (China Times, January 21, 1994; Linn, 1996). Thus, we would argue that the point made by Rexrodt about German investors using Taiwanese businesses as a model for doing business in China might also be appropriate for the small and mediumsized U.S. investors. Therefore, the focus of our paper will be how the Taiwanese approach might be used by small and medium-sized U.S. investors to successfully enter the Chinese market. However, given the apprehension and concerns about the "peril" of investing in China, we begin by devoting the following few paragraphs to a brief overview of why it is important for U.S. companies, whether large or small, to consider investing in China. Next, we compare and contrast the U.S. MNCs approach to doing business in China with that of the Taiwanese small-businesses. Finally, we will draw some conclusions by presenting seven lessons about doing business in China that we believe small and medium-sized U.S. businesses might learn from their Taiwanese counterparts. WHY U.S. COMPANIES MAY WANT TO CONSIDER INVESTING IN CHINA American business may consider investing in China because China has achieved remarkable progress in economic development in recent years. Since the reform and opening of the doors to foreign trade in late 1970s, the production force in China has been liberated and overall national economic strength has increased markedly. In terms of absolute figures, China ranks number one in the output of several major industrial and agricultural products, in cluding grain, meat, aquatic products, poultry eggs, oil-bearing crops, coal, cement, cotton yarn, cotton, cloth, silk fabrics, clothing, knitwear, bicycles,

washing machines and TV sets. In addition, China is among the world leaders in the production of steel, chemical fiber, wool fabrics, non-ferrous metals and electric power. In 1997, China's gross domestic product (GDP) totaled 7,477.2 billion yuan, an 8.8 percent increase over the previous year, and 20 times more than that of 1978 (Shi, 1998; Peoples Daily, December 15, 1998). Foreign investors have been very impressed by China's near double-digit economic growth over the past two decades (Bonsignore, 1996; Davies, 1998; Peoples Daily, December 15, 1998; Walker, 1996; Wang and Ralston, 1995). Second, many believe that China will become the largest manufacturing zone in the world and the largest market for such industries as telecommunications, automobiles, aerospace, and even soft drinks (Bonsignore, 1996; Business Week March 29, 1993; Economist , 1994). With a market of over one billion customers, plentiful, low-cost labor, and rapid industrial development and economic growth, the need for foreign investment in China is great. The Chinese government estimates that for the ten years of 1995 to 2004, China will seek approximately $75 billion in foreign investment (People's Daily, April 4, 1997). Third, since the initiation of the economic open door policy in the late 1970s, the Chinese government has adopted a series of policies to encourage foreign investment (McNaughton, 1998; Prime & Park, 1997; Shi, 1998). For example, many laws and regulations regarding foreign investment have been passed, including The Law on Chinese-Foreign Joint Ventures, Wholly Foreign-Owned Enterprises, and Provision of the State Council for the Encouragement of Foreign Investment . In addition, China has also been offering very attractive tax rates for foreign investors. China's current corporate

tax rate for joint ventures is 15 percent in most areas of investment, compared with an average tax rate of 30 percent or more in most neighboring developing countries (Cho and Tung, 1998; Chui and Cheung, 1998; Leung, 1998). Furthermore, in recent years the Chinese government has drastically lowered its tariffs. In 1996, the average import tariff decreased from 42.1 percent to 23 percent. At the end of 1997, it was further lowered to 17 percent. It is expected that by 2000 the overall tariff will be lowered to 15 percent (People's Daily, March 22, 1997). 1 Fourth, China's rapid economic growth through the late 1980s and early 1990s, favorable economic conditions, and support for free-market reforms have proved to be sufficient to attract many foreign companies to invest there (Bonsignore, 1996; Leung, 1998; Sun & Tipton, 1998; Walker, 1996; Young, 1998). In the past twenty years, foreign investment in China grew from virtually non-existent to a substantial amount, with direct foreign investment standing at $45.3 billion in 1997 alone. According to the World Investment Report (United Nations, 1998), the total foreign direct investment in China in 1997 was more than half of that in all Asian counties and regions. It counts for about onethird of the total foreign direct investment of all developing countries. In addition, next to the United States, China has remained the second biggest recipient of foreign investment in the world for six consecutive years. Insert Table 1 about here Furthermore, by investing in China, companies can not only reduce production, labor, and other costs in the long run, but by establishing local offices or factories and

manufacturing locally, they can also overcome Chinese import barriers. Additionally, investing in China can provide a source for raw materials that can be either produced for their markets or sold directly to these markets (Bosignore, 1996; Brub & Lin, 1991). The excellent investment environment and favorable returns on foreign capital have greatly strengthened the confidence of investors. Many of them are reinvesting, expanding production, or extending the terms of their cooperation. Many internationally known consortiums, multinational corporations and large firms have selected China as their main overseas investment area (Moore & Miller, 1997; Sun & Tipton, 1998). Some are planning to invest enormous amounts in power plants, bridges, highways, or other infrastructure projects, while others are working out long-term or mid-term plans for investment. Another very important factor that almost forces some U.S. companies to invest in China is that the Chinese government has invited three or four foreign firms to form joint ventures with the intention of trying to block further imports and additional foreign investments in several sectors, including automobiles, telecommunication equipment, and process control machinery (Exporter's Encyclopedia , 1994; Zita, 1998). Exacerbating this situation for the U.S. investor is that companies from many countries and regions have entered the Chinese market. It is reported that 170 countries and/or regions of the world have invested in China. Therefore, if U.S. companies do not get into the Chinese market now, it might be very difficult, if not impossible, to enter these market in the future. Finally, the Chinese government has taken several important countermeasures to cope with the recent financial crisis in Asia, including (1) stimulating domestic demand by increasing investment in infrastructure development, (2) increasing input in high and new

technology industries, technical renovation of existing enterprises and housing development; (3) circulating the newly revised Interim Regulations Guiding Foreign Investment and Industrial Catalogue Guiding Foreign Investment; (4) reintroducing the policy of duty exemptions for equipment imported by foreign-invested enterprises; and (5) encouraging foreign companies to invest in the central and western areas. It appears that these measures have helped China in dealing with the severe financial crisis in the region (Shi, 1998). According to a recent survey of the over 4,500 foreign investors who are members of the Asian and Pacific Economic Corporation, China is still the number one place for investment. Eighty-seven percent of surveyed investors listed China as the first choice for investment because of Chinas abundant low-wage labor, preferential governmental policies, and huge potential market (Chinas Security News, December 31, 1998). In summation, China presents golden opportunities to the knowledgeable investorwhether large or small. A COMPARISON OF THE U.S. AND TAIWANESE APPROACHES When we compare and contrast the U.S. approach with the Taiwanese business approach, we find that there are a number of interesting differences in addition to their sizes. Size of Operation Most U.S. companies that invest in China are large multinational corporations (Business Week, March 29, 1993; People's Daily, November. 2, 1995; March 15, 1997). They aggressively spend huge amounts of money in order to penetrate the Chinese market. For instance, in early 1993, Wing-Merrill closed a $2 billion deal with China to build what will be one of the biggest power projects in China when it is completed in about 10 years. At the same time, AT&T also reached a $1 billion landmark agreement

to manufacture switches, wireless phones, and integrated circuits in China. According to one AT&T representative, this deal "...will dwarf everything else AT&T does in the world" (Business Week, March 29, 1993). General Electric's investments and assets in China have already exceeded $1 billion, making GE one of the largest investors in China (People's Daily, March 15, 1997). In 1997, AT&T signed another deal with the Chinese government to lay undersea fiber-optical cable which will connect China, the United States, Japan, and South Korea directly. The cable network can also be linked with other countries in Asia, South and North America, Europe, and the South Pacific. The total investment is $1.2 billion (People's Daily, March 31, 1997). According to a recent report, among the Forbes top 500 companies more than 100 have operations in China (People's Daily, March 22, 1997). On the other hand, Taiwanese companies tend to be small and medium-sized companies. Previous research conducted by the Taiwan Ministry of the Economy indicated that the average individual investment of these Taiwanese companies is $1.35 million, while the average individual investment of the three other major investor countries, Hong Kong, Japan, and the United States, is about $2.78 million (Central China Daily, February 24, 1994). According to Shi and Zhou (1995), among the twelve major countries/regions that have investment in China, Taiwan is ranked 11th in terms of the size of each individual project. Profit Time Frame U.S. multinational corporations tend to have long-term strategic plans for their investments in China (Bonsignore, 1996). They try to establish their dominance in the

Chinese market by investing millions of dollars. For instance, Coca-Cola, one of the first U.S. companies to invest in China, has planned to build ten more bottling plants that will cost approximately $150 million (Business Week, March 29, 1993). Motorola completed a $120 million first-phase plant in the Tianjin Economic and Technology Development Area at the end of 1993. A second-phase p lant, which should include automotive electronics and advanced microprocessors, could cost more than $400 million. According to a recent report, Motorola plans to invest approximately $1 billion over five years to expand its operations in China. By year 2000, Motorola's total investment in China will be up to $1.2 billion (People's Daily, November 2, 1995). Since U.S. MNCs have invested millions of dollars, they clearly have the long-term investment strategy of trying to establish their dominance in the Ch inese market. For instance, in January 1993, Honeywell established a joint venture with Sinopec (China National Petrochemical Corporation), the worlds third largest oil refiner. Honeywell owns 55 percent of the venture, with Sinopec owning the remaining 45 percent. Honeywell made another deal with Sinopec in 1995 which allows Honeywell to sell $150 million worth of equipment to Sinopec's 38 refineries or petrochemical complexes in the following five years. In 1996, Honeywell added an assembly plant in Chin a to produce temperature control units for office buildings. The next target of Honeywell is China's air transport industry which needs 1,000 new aircraft in the next 15 years (Bonsignore, 1996). The U.S. companies long-term strategies can also be seen in their investment in banking and insurance industries in China (Harding, 1997). Through March 1997, five U.S. banks have opened branches in China. Additionally, among the six foreign insurance companies in China, three are U.S. companies (People's Daily, M arch 22, 1997).

Due to the political uncertainty in China, Taiwanese investors are more conservative in evaluating the potential of doing business in China (Executive Yuan, Mainland Affairs Council, 1992). In order to avoid the risk of long-term investment, Taiwanese companies have adapted a more short -term profit-oriented strategy. They spend less time in establishing factories in China. The average time spent from planning, signing contracts, and building the factory to production is about 1.2 years. Taiwanese investors also spend less time getting returns on investments. The average time from its first production to break-even on investment is about 1.17 years, which is much sooner than other countries' investors (Central Daily News, February 25, 1994). In addition, Taiwanese often rent factories to run their business at the early stages of the investment process, with the duration of the contract being short as well. Industry Orientation Relatively speaking, U.S. companies are more likely to invest in heavy industry. Thus, they have higher capital-labor intensive ratios (Pomfret, 1991). According to a 1987 sample survey of 301 equity joint-ventures, among 97 U.S. investment projects from 1979 to 1985, about half were in heavy industry (Pearson, 1991: 89). On the other hand, like the Japanese and other Asian investors, Taiwanese investors are more concentrated in light industries. The amount and order of the investments are as follows: electronic- and electronic appliance making ($841 million, 15.4 percent), food and drink-making ($647 million, 11.8 percent), rubber- and plastic-making ($570 million, 10.4 percent), general metal-making ($454 million, 8.3 percent) and chemical mechanics -making ($383 million, 7.0 percent). More specifically, over 90 percent of both shoe and umbrella

manufacturing and over 50 percent of toy and sporting goods manufacturing have already moved from Taiwan to China (Tian, 1995). Technology Although the U.S. government policy toward the export of sophisticated technology to China has been ambiguous, studies have shown that U.S. investors have been more willing than others to transfer their technologies and capital to China (Meall, 1996; Pomfret, 1991; Young and Lan, 1997). Even the Chinese government cited U.S. investors for hav ing transferred advanced technology (People's Daily, March 22, 1997). These U.S. companies have been willing to invest in these industries because of the availability of a better-trained and educated labor force in China, especially in basic science. Production quality in China seems to be much less a problem for these corporations. For example, by the end of 1987, the U.S was the source of approximately 50 percent of all foreign-funded advanced technology ventures in Shanghai (Pearson, 1991:95). In 1993, according to Ko Ching-Wen, Motorola's personnel director in Tianjin, "The products assembled in Tianjin are already close to the standards of its Singapore plant" (Business Week, May 17, 1993). Companies specializing in information technology, such as IBM and Microsoft, have also been very active in investing in China in recent years (Meall, 1996). Like other foreign investors, one of the primary reasons for Taiwanese investment in Mainland China is to utilize cheap labor. Thus, most Taiwanese investment is in the laborintensive manufacturing area. In fact, it has been argues that the Mainland is the production site of labor-intensive Taiwanese industry (Tian, 1995; Qian, 1994). For instance, five of the traditional manufacturing industries comprise 52.9 percent of Taiwanese investment in China.

Location Orientation While most foreign investors tend to invest in the southeast coastal region, especially in the Special Economic Zones, U.S. investors are more diversified, having a substantial stake in the interior. It is reported that even in the early 1990s, U.S. companies were more likely to invest in inland China. According to Shapiro, Behrman, Fischer & Powell (1991:87), The number of contracts and values of U.S. commitments in the interior are seen as substantial and in sharp contrast to the Japanese who have virtually ignored the interior. The value of dollar commitments from the United States, however, is heavily skewed by the Occidental Antaibao coal mine project. This project alone represented some 75 percent of total U.S. commitments in the interior. Even so, U.S. companies have other investment in the interior besides the Antaibao project. In 1996, Beijing Review reported that an U.S. oil company planned to invest in the Caidamu Basin located in inland Qinhai Province of northwest China (Beijing Review, February 12-18, 1996). Additionally, according to a recent report, the U.S., along with Canada, France, Israel, and Mexico are the leading foreign investors in the Greater Northwest China area (People's Daily, March 31, 1997). Like most foreign investors, Taiwanese investors also prefer to establish their businesses in southeast coastal areas. According to the Economic Ministry of Taiwan, in 1990 there were 9,100 Taiwan enterprises with investment in the mainland; 1,802 enterprises, about 20 percent were located in Guangdong Province. Fujian province, especially in the Xiamen Special Economic Zone, across the strait from Taiwan was the next favorite location. Another study showed that the top ten provinces and cities in which Taiwanese have large investment were: Jiangsu, Shanghai, Guangdong, Shengzhen, Dongguan, Xiamen, Fujian Province, Guangzhou, Zhejiang Province, and Fuzhou (Gao, 1994:59). However, in recent years Taiwanese businesses have started to move into the inland areas and even the western regions of China.

Market Focus Studies show that U.S. companies are trying to penetrate China's local markets and focusing much of their attention there (Kuo, 1992; Shi and Zhou, 1995; People's Daily, March 27, 1997; Shi and Zhou, 1995). For instance, General Motors recently signed a $1.57 billion deal with Shanghai Automotive Corporation to establish two automotive companies in Shanghai. The anticipated annual production, 100,000 Buick Salons, will be sold only in the Chinese domestic market. At the same time, Boeing signed a $685 million contract to sell five Boeing 777-200s to Air China (People's Daily, March 27, 1997). On the other hand, it seems that Taiwanese investors in China used the same export-oriented strategy that already had succeeded in Taiwan (Wang and Ralston, 1995; Xu, 1996). Large portions of Taiwanese companies' production in China were exported to other countries. Only 35.4 percent of the production was sold to local markets, 12 percent was sold back to Taiwan (through Hong Kong), and 53.6 percent of the production were exported to other countries (Central Daily News, February 25, 1994). These small or medium-sized companies also adapted the cost leadership strategy to manufacture their products in China. They used simple production processes, imported the materials from Taiwan, manufactured in China at a lower labor cost, and then exported to other countries. Textiles, furniture, shoes, umbrellas, decorations, and other labor-intensive industries, which were considered to be the sunset industries in Taiwan, all were reborn again in China. Overall, these export-oriented industries are very profitable to Taiwanese investors (Chuang, 1993; Xu, 1996). Organizational Forms

U.S. investors adopted various organizational forms to run their ventures in China. Some are interested in joint ventures, while others are interested in wholly owned subsidiaries. For instance, Motorola recently announced that its top priority is to run its business itself (People's Daily, April 7, 1997). Conversely, most Taiwanese investments in China have been established through joint ventures with local Chinese partners. According to Qintang Huang (1995), the deputy secretary of the Committee on Investment, Department of Economics of Taiwan, approximately 70 percent of the Taiwanese companies in China are joint ventures. In the early stages of the investment, Taiwanese investors favor forming a joint venture in order to build good relationships with the local community and government, then get access to local resources and marketing channels or obtain information about the possible future development of the local investing environment. Only after accumulating enough experiences are Taiwanese investors inclined to form a wholly owned venture in order to have fuller control over the operations. Means of Production Like Japan, Hong Kong, and other foreign investors, U.S. companies were not heavily dependent on their parent companies capital support, but borrowed a large sum from the local banks (Central Daily News, February 25, 1994). Additionally, they have relied relatively heavily on supplies of local raw materials and human resources. On the other hand, Taiwanese companies are more self-sufficient (Wang and Ralston, 1995; Xu, 1996). First of all, instead of borrowing the fund from local market, they bring in their own capital from the parent companies in Taiwan. Second, most Taiwanese companies do not seek local supplies of raw materials, and they transfer the raw materials from Taiwan

to Chinas plants. Third, most Taiwanese companies bring in their own management teams to China. Political Support In trying to establish the dominance in the Chinese market, U.S. MNCs have relied greatly on political influence. Big U.S. corporations worked closely with the U.S. government and also tried to shape U.S. government policies toward China (Bonsignore, 1996; Accountancy, 1998; Gilley, 1998). For example, in the early 1980s, with pressure from the business community, the U.S. government moved China from "category P" to the "friendly or allied with the U.S." category to allow U.S. oil companies like Occidental and Exxon to carry out their offshore oil contracts with the Chinese government (Ho and Huenemann, 1984:168). In the early 1990s, major corporations lobbied the U.S. government to be patient with China and to support legislation to renew China's status as a Most Favored Nation [MFN] (Business Week, March 29, 1993; Far Eastern Economic Review, March 24, 1994). In 1994, the Clinton administration finally decided to de-link human rights issues in China from its MFN status under pressure from the U.S. business community (Zhang, 1995). In addition, U.S. MNCs also used Chinese political power directly. For example, it is reported that Armand Hammer, chairman of Occidental Petroleum, would fly to Beijing to meet with Den Xiaopin, China's former leader, whenever problems arose (Kahn, 1996). On the other hand, governmental support for Taiwanese business has been relatively weak due to historical and political reasons. For instance, Taiwanese were not even allowed to travel to the Mainland to visit their relatives until 1987. In addition, Taiwan governments policies about investment in Mainland have fluctuated over the years. In 1994, the Taiwanese government issued series of policies to encourage business to invest

Southeast countries and regions. Starting in 1996, the Taiwanese government again issued a series of policies to slow down Taiwanese investment in China (Wang, 1998). However, Taiwanese businesses have developed a good relationship with the key individuals in the local community and government. Overall, large size, a long-term orientation, the transfer of needed technologies, diverse locations, penetration of the Chinese domestic market, and the use of political influence have typically characterized U.S. investment in China, as shown in Table 2. Conversely, the Taiwanese investors in China tend to be small and medium-sized, with a short -term orientation, concentration in coastal areas, joint venture strategy, export orientation, adaptability and working with local government philosophy because they do not have strong resources like U.S. investors. Nevertheless, the studies showed that both U.S and Taiwanese investments are making profits. In other words, both approaches of investment work. In fact, it is reported that Taiwanese companies are more successful than investors from other countries.

Insert Table 2 about here LESSONS THAT CAN BE LEARNED FROM THE TAIWANESE INVESTORS Unlike large MNCs that are capital rich, small and medium-sized U.S. businesses are hesitant to invest in China because they do not have strong financial resources. Nonetheless, the success of small Taiwanese businesses suggests that small and medium-sized U.S. businesses can be players in the Chinese market if they want to be. For small and mediumsized U.S. businesses to be successful in China, they may want to model their strategies after those of the small Taiwanese companies. The essence of this point is epitomized in a

statement made by Y. C. Wang, the President of the Formosa Plastic Corporation and Taiwans largest manufacturing company, "In China, corporations should use small companies' ways of doing business. They are flexible, powerful and closer to the market. They succeed more easily in the new market than the big companies do" (China Times, January 21, 1994). What can the U.S. small and medium-sized investor learn from their Taiwanese counterparts, and can the strategies of the Taiwanese approach be transferred to U.S. companies? In the following section, we look at several major strategic components of the Taiwanese approach and suggest how U.S. business might try to emulate these strategies. Lesson 1: Size and Profit Time Frame Overall, we argue that small and medium-medium-sized companies can be effective in investing in China based on Taiwanese experience. This is because small and mediumsized companies are flexible and adaptable. However, for a small or medium-sized U.S company to be effective in China, it will have to develop a strategy that is predicated upon a much shorter profit period. Lesson 2: Determining Products and Service Like the Taiwanese investors, U.S. small and medium-size companies need to develop differentiated products and to provide services to meet Chinese demands, even when these demands are not totally congruent with those of the investor. For the foreign investor, home-country sunset industries are likely to be very relevant ones to consider. However, as with any investment project, it is imperative to minimize the risk of investing in China, and in China the rules of investment are different. Being adaptable to a new style of doing business continues to be the key for success.

Specifically, for example, an export-oriented project may be more acceptable than an import - or local market-basis project because the Chinese government encourages the sale of the products of joint ventures in international markets. In the past twenty years, the Chinese government has offered many incentives to encourage foreign investment in export-oriented projects, including (1) reduced or exempted site-use fees, (2) given priority in receiving loans, (3) given priority in obtaining water, electricity, transportation services, and communication facilities, and (4) reduced their taxes and exempted them from various other taxes. 2 Also, projects that can absorb large surplus labor in China are strongly encouraged by the govern ment. Foreign investors certainly could consider hiring many laid -off workers from the state-owned enterprises. The Chinese government has offered a series of incentives for such kind of projects. In terms of technology, it is not necessary to create the highest quality products or use state-of-the-art technologies. However, a high-tech joint venture with technology transfer is always welcomed by the Chinese government (Yang, 1998; Young and Lan, 1997). Overall, if investors are willing to modify their strategies to adapt to the needs of China, like the Taiwanese businesses, the Chinese government may be much more easily convinced to support, or at least not impede, the investing project. Lesson 3: Choosing Locations Even though Chinas transportation infrastructure has been improved significantly in the past twenty years, the existing system can only carry approximately 60-70 percent of the increasing demand. Harbors are congested, the rail system is overburdened, air transport

is hampered by lack of equipment and trained personnel, and the highway system suffers from inadequate maintenance. Therefore, U.S. small and medium-sized companies need to select locations for investment carefully. Foreign investors also need to recognize that there are regional differences. China is a huge, but not a homogeneous market (Ralston, Yu, Wang, Terpstra & He, 1996). For example, in regards to the food industry, people in the North like a salty taste, while people in the South like sweet foods. In the North people eat noodles and wheat-product foods, while in the South, rice is preferred. Moreover, consumer behaviors are different throughout the country, and the income levels and purchasing power have a wide range in different areas of China. Therefore, foreign investors must study the different market characteristics in China when they are planning to enter local markets and provide the differentiated products that meet the needs of the region (Liang et al., 1993). Most of the foreign investments are located along the coastal line areas or in SEZs in large part because of the following conditions (1) governmental preferential policies for these regions; (2) proximity to the world market, (3) an abundance of the bettertrained personnel, and (4) greater purchasing power of consumers. However, the labor cost in these areas has also grown higher in recent years. Some Taiwanese investors suggest that businesses should look at inland opportunities or select joint ventures in the new SEZs in order to get lower labor cost. Of course, locations that are closer to harbors will be better for export-oriented industries because of the poor transportation system in China. In recent years, Taiwanese companies have begun to move into inland China, with the large U.S. companies appearing ready to move inland as well. In large part, this has been

due to recent Chinese government policy that has encouraged foreign investment in the central and western regions. For example, now the provinces, autonomous regions, and cities in these regions enjoy the same right to approve foreign investment as do the coastal areas. Additionally, domestic funds have been increased to support foreign investment in the region, and there are many attractive preferential policies now offered for investing inland. For instance, any investment project with 25 percent of foreign participation will be treated as a foreign-investment project (Shi, 1998; Liu, 1998). Lesson 4: Establishing a Market The Chinese have a very positive image of American products. Taiwanese products, likewise, are held in high regard. Thus, products from both the U.S. and Taiwan hold this comparable advantage in the Chinese market (Yang, 1998). In addition, it should be remembered that due to its poor infrastructure, China is still today a cluster of segmented regional economies. Thus, its current distribution channel is not very sophisticated. Most agents and local franchises are state owned, and it is very difficult to use direct s ales or set up centrally controlled distribution centers (Liang et al., 1993; Huang, 1995). In order to distribute their products, investors should establish a good relationship with these agents and local franchises (Pomerantz, 1998). As a Taiwanese government official pointed out, foreign investors should learn from Taiwanese investors to build alliances with state-owned, township/village-owned and privately owned companies in order to establish wholesale networks (Huang, 1995). Further, small or medium-sized businesses that want to enter local markets should develop one market at a time, and then transfer their successful experiences to another market. This approach is especially relevant in light of the different pricing systems across

the various market segments, which makes it necessary for investors to learn their markets and price accordingly. Lesson 5: Selecting Organizational Forms There are basically two types of foreign ventures in China: the joint ventures that have a Chinese partner and the wholly owned ventures that are totally controlled by foreign investors. Based on Taiwanese experience, it appears that, in most instances, joint ventures are a good way for foreign investors especially new entrants in the Chinese marketto gain access to local resources and marketing channels. Foreign investors should aggressively establish good relationships with Chinese partners as well as local organizations. After accumulating enough experiences and better understanding the market traits, foreign investors may consider switching to a wholly owned venture (Moore, 1998; Yang, 1998). As discussed before, most Taiwanese companies have adopted this two -step entry strategy. It has worked very well for them and should work for U.S. businesses as well. Additionally, foreign companies must be able to control the daily operations, marketing strategy, financial aspects, and R&D policies. However, in a joint venture, one has a partner, and the issues of control are crucial to the long-term success of the business. These issues need to be resolved, to the degree possible, before start-up. Only after investors get control over the ventures can a company's performance be predicted. Some Taiwanese companies have experienced loss of power in the joint venture because their Chinese partners have intentionally used a different accounting system to increase Chinese equity and take over the authority of operation (China Times, January 21, 1994).

Moreover, foreign business needs to work to avoid (or minimize) central or local government interference in policy making. Taiwanese companies have occasionally experienced Chinese partner interference with purchasing decisions, where the focus was more on political benefits rather than on company profits. Lesson 6: Selecting Means of Production As noticed, most Taiwanese companies do not rely on local supplies of raw materials. Instead, they transfer the raw materials directly from Taiwan. Even though using imported materials is more expensive than using local sources, this approach can help to alleviate the severe quality problems that have plagued most foreign investors. It is reported that some companies have suffered substantial losses from using poor-quality raw materials that have resulted in high rejection rates (Kuo, 1993). In terms of personnel, it may be difficult for a foreign investor to find a suitable and trusted person to handle its operations in China, especially at the early stages of the investment. As discussed previously, most Taiwanese companies bring in their own management team to China. A small and medium-sized U.S. company can employ a similar strategy by hiring overseas Chinese from Hong Kong, Taiwan, or Singapore. Needless to say, using local managers is the best way to improve communication between managers and employees in the long-run (Frezee, 1998; Yang, 1998). However, a company needs to have a good personnel system and excellent training programs to localize the management team (Abramson & Ai, 1996; Liang et al., 1993). Taiwanese managers have advocated the following practices: (1) recruiting only employees that the company really needs, (2) instilling employees with a corporate culture, (3) using appraisal systems to encourage employees to work harder and to change the false concept

that everyone get the same pay and benefits, and (4) localizing management levels to keep good employees in the company (Liang et al., 1993). If a company promotes middle managers from local employees, good employees would be more likely to stay in the same company. It is also easier to communicate with employees using local managers. Concurrently, corporate culture has to adapt to the local culture and to be considerate of China's different value system. The Chinese people have long been under tight government control. It would not be prudent to try to introduce a totally Western management style in China all at once. Thus, a multi-domestic corporate culture philosophy, one where corporate culture is shaped to uniquely fit the local cultures of the specific locations, may be a worthwhile strategy to consider when entering the Chinese market (Ralston, Holt, Terpstra and Yu 1997). It is important for foreign investors to realize that China's capital markets are presently dominated by the state banking sector, which channels the majority of its funds to state-owned enterprises. Companies that need working capital, either foreign exchange or local currency, may deal with the shortage through currency trading of short -term loans from the Bank of China and certain other Chinese financial institutions. However, priority in lending by these institutions is given to those investments that bring in advanced technologies to China or produce goods for export. Most of the foreign-invested firms have found it difficult to borrow funds from local financial institutions, unless they have very good relationships with these institutions (Central Daily News, February 25, 1994). Obviously, from the foreign investor's point of view, minimizing financial risk is a major concern, especially for small and medium-sized companies. As illustrated in the previous paragraphs, U.S. investors can learn from their Taiwanese counterparts that they

need to adopt a more conservative financing strategy and a self-sufficiency philosophy to avoid exposure to certain risks not inherent in the U.S. system. Taiwanese experience has also found that most Chinese accountants are just bookkeepers. They lack the ability to analyze data. Therefore, it is important to establish a good accounting system and to strengthen the ability of key employees to do financial analysis. Foreign investors must be prepared to provide extra training for accountants to improve their ability to analyze costs and expenses and to prepare financial reports (Chuang, 1993). This point seems especially relevant for small and medium-sized businesses that are more sensitive to the cost factors of an operation. Finally, in order to maintain return on investment, investors have to estimate related cost and expenses correctly. The costs most often underestimated by foreign investors are indirect benefits costs. A Taiwanese investor estimated that health care (20%), medical care (7.5%), pension (20%), and job training cost (1.5%) adds almost 50% to the base salary cost (Liang et al., 1993). Moreover, there are some meal subsidies, housing subsidies, union dues and other expenses that must be factored in to the remuneration package equation. In sum, it may take twice the base salary to fully cover the implicit costs. Thus, properly estimating the indirect costs is a pitfall that foreign investors should be careful to not fall into when developing their financial strategy. Lesson 7: Understanding Politics There are over 150 major laws and regulations that apply to foreign investment. It goes without saying that U.S. small and medium-size companies should be familiar with Chinese laws and regulations. Part of the success of the Taiwanese approach is that they invest time in becoming quite familiar with the government and its activities. Specifically, from the

Taiwanese investors' point of view, there are six issues that should be explored by foreign investors in any venture (Executive Yuan, Mainland Affairs Council, 1992). Incentives for Investments . Determine what kinds of projects are more favored by the relevant Chinese ministries and whether there are tax deductions or tax-free incentives. Foreign technology corporation regulations . Determine whether it is necessary for the joint venture to provide a technology transfer, and if so, to what degree. Customs and tax regulations . Since different products have different tax rates and since selling to local markets is different from exporting, determine how the customs and tax regulations will affect the joint venture. Environmental protection regulations. Although China is much more liberal when it comes to a companys responsibility to the environment, there are environmental regulations, especially on the heavy industries and the chemical industries. Therefore, it is necessary to determine if there are any relevant environmental regulations on the joint venture. Quality standards . Determine what the quality standards are for the product(s) to be produced for both exports and local markets, since these standards frequently differ. Law of mediation . When there are disputes between foreign investors and Chinese partners, investors should go through the mediation process. Therefore, it is important to understand this process before entering the join venture, should it become necessary to go to mediation. It should be noted that China has been decentralized since late 1970s. Many regional governments now have issued their own regulations for foreign investment. U.S. small and

medium-sized businesses need to know the different laws and regulations, various incentives for foreign investors, and the approval processes in different regions. However, what is even more important is that the Taiwanese are skilled at dealing with government and party officials and that they know what these individuals want. U.S. investors need to realize that the Chinese administrative system still relies heavily on the personal rules (Guanxi) that come from the people in power, rather than from laws or regulations (Bian, 1994). The efficiency of the government administrators appears to be improving, but at present, these changes are not occurring as fast as the regulations are having to be changed to meet foreign investors' requirements. Thus, it is critical for foreign investors to appreciate, if not to understand, the administrative procedures and the traditional way of doing things in China. For example, most foreign investors realize that China's poor infrastructure is a major problem. However, what many foreign business people do not understand is that sometimes it is not enough to just to send an application form to the local officials for the use of electric power, water, and telephone. A personal visit to the office of the official often can quicken the approval process. Sometimes inviting key government people to dinners or sending gifts to officials is considered necessary action and simply good etiquette. However, foreign investors should use Guanxi only in a moderate manner to get access to local resources or to solve unexpected problems. Additionally, a word of caution, it is critical to realize who the key people are in the community and government, and who has the authority and the power. Who these people are is not always obvious. Nonetheless, the positive and correct use of Guanxi can substantially help foreign investors smooth the problems out of their Chinese adventure (Liang et al., 1993). Thus, the Public Relations

Department is an important part of the company, and it needs to be staffed with individuals who are sensitive to the ways of the culture. A better understanding of the laws and the administrative system in China can help foreign businesses have a good beginning in the investment process. Adapting to the Chinese way of doing things may be challenging fo r the foreign investor, but it will be much more acceptable to the Chinese officials than going against them and can pay great dividends in the long run. DISCUSSION AND CONCLUSIONS China, the world's third largest consumer economy, continues to be also one of the world's fastest growing economies. Overall, China's real GNP growth is projected at 8 percent entering the new millennium. Investment in China will continue to provide huge potentials for foreign investors. However, these potentials may not be realized if investors do not understand how to successfully do business in China (Shi, 1998; Davies, 1998). Clearly, there are a number of concerns that foreign investors have regarding an appropriate approach for investing in China. This is especially true for the small and medium-sized businesses that have relatively limited resources with which to speculate in a Chinese investment venture. In this regard we have proposed the Taiwanese model of business as one from which small U.S. investors can learn. However, it is important to realize that while some of the Taiwanese strategies may be easily emulated, others are more difficult to replicate. For instance, choosing the location of an investment project is certainly easier than learning how to deal with the Chinese government and officials. In addition, it is important to realize

adopting certain strategies is the prerequisite for adopting other strategies. For example, understanding the Chinese cultural is critical to build "Guanxi" and political power coalition. Needless to say, the key advantage for Taiwanese companies investing in China is that they have no language and cultural barriers. However, that does not mean that small and medium-sized U.S. companies can not learn from Taiwanese companies. The analogy that Taiwanese companies are peaches and U.S. companies are coconuts is likely an overstatement. For instance, U.S. small and medium-sized companies can hire Chinese managers to run the businesses, even though it is not a prerequisite for small and mediumsized U.S. companies to be successful in investing in China. For those small and medium-sized U.S. companies that want to hire Chinese managers, there should not be a problem. First, many people in China now speak fluent English, and it is not difficult to find representatives and managers inside China. In fact, there are many consulting firms in China, especially in the larger cities, that can find the best talent in China for foreign companies. For instance, there are at least seven major consulting firms that specialized in recruiting bilingual, talented employees for foreign companies. All seven companies have their own web sites on the Internet. Additionally, U.S. companies can hire overseas Chinese in the United States. It is reported that there are about 80,000 to 100,000 Chinese who study and work in various U.S. universities and institutions. Most of them are seeking employment opportunities in U.S. Those students not only have expertise in their own training but also their networks back in China. Thus, it should not be assumed that cultural and organizational differences are too great a barrier to overcome. There are overseas Chinese that can help to bridge the culture gap and there is an attitude in today's China that embraces the use of Western -style

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Notes
1[1]

For more detailed information about Chinese government policies regarding foreign investment, please see 1999 Country Commercial Guide and 1998 National Trade Estimate Reports. For more detailed information, please see Peoples Republic of China Interim Regulation Guiding Foreign Investment, and Industrial Catalogues Guiding Foreign Investment.

Table 1. Cumulative Foreign Direct Investment [FDI] in China from 1979 to 1997

Year 1979-1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Total

# of Projects 920 638 2,166 3,073 1,498 2,233 5,945 5,779 7,273 12,978 48,764 83,437 47,549 37,011 24,556 21,001 304,821

Contract FDI ($100 millions) 49.58 19.17 28.75 63.33 33.30 37.09 52.97 56.00 65.90 119.77 581.24 1114.36 826.80 912.82 732.76 510.03 5203.93

Realized FDI (100 millions) 17.69 9.16 14.19 19.56 22.44 23.14 31.94 33.93 34.87 43.66 110.08 275.15 337.67 375.21 417.26 452.57 2218.52

Source: Statistics Yearbooks of the Peoples Republic of China.

Table 2. Different Approaches for Investing in China Factors American Investors Taiwanese Investors

Size of Operation Profit Time Frame Industry Orientation Technology Location Orientation Market Focus Organization Forms

Multinational companies Long term Light and heavy industries High-tech Coastal and inland Penetrating domestic market Various Various

Small and medium-sized companies Short-term Light industries Labor-intensive Coastal Export Joint-ventures Self-sufficient Weak, deal with local government

Means of Production Strong, deal with central government Political Support

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