Exploration of fittest entry mode to China——Case study of Inner Mongolia Oats Mill

YANG Xiao－hong

（Hohhot Vocational College，International Education Department，Hohhot 010000，China）

杨晓虹

（呼和浩特职业学院 国际教育学院，内蒙古 呼和浩特010000）

0 Introduction

As everyone knows，China has become the second largest global economy.Since opening its doors to the outside world in 1978，China began has transformed itself from a centrally planned economy to a more market－oriented economy with a rapidly growing more private enterprises and has become a major player in the global economy［1］.The change has not only allowed large numbers of domestic private enterprises to spread all over China，but also foreign companies to enter into the huge market.In order to attract more foreign investment，the Chinese government has offered anumerous policies incentives in special economic regions which lead those areas become a highly liberalised market economy as well as tax incentives and relief.More recently，China is renowned as one of the most ideal places for foreign investments due to the huge domestic market and still relatively low cost of production and favourable tax treatment［2］.

China is a vast country with a complex market that require a consideration of business environment carefully and business structure appropriately［3］.According to official definition，business companies are mainly split into three types：joint ventures；wholly foreign owned enterprises and domestic business.In China the purpose of attracting FDI was to obtain foreign capital advance technologies and management skills，upgrading the industrial structure and stimulating economic growth.By the end of 2011，total of use foreign investment in China amounted to 135.583 billion U.S.dollars［4］.FDI inflows in China distributes differently the four geographical areas named as the coastal region，northeast region，central region and western region with disparity in provincial characteristics and location factors［5］.

The Chinese culture is deeply rooted in“harmony”.Guanxi is a complex social construct having its own logic and forms and shapes the Chinese social structure［6］.Workplace‘guanxi’with co－workers and supervisors is critical and is linked to various work－related job satisfaction and organizational commitment［7］.Role of‘guanxi’has been cultural norm followed in business dealings with managers in China and a Chinese system of doing business based on personal relationship throughout much of the non－western world［8］.Usefulness of‘guanxi’facilitates procurement of information and resources，obtains business and enhances business successfully，even eliminates competition and so on［9］.

Many years ago，EJVs were a popular entry mode by the following reasons：first，the Chinese government believes that EJVs are the best for China to achieve the objective of absorbing foreign capital，technology，and management expertise.Second，foreign companies hope that the local partners may assist in penetrating the domestic markets，accessing activities and provide critical inputs by adopting this manner.However，studies shows that most of joint ventures performed unsatisfactorily or poorly，even failed［10］.Renewed interest by foreign investors in joining forces with Chinese enterprises has apparently been provoked due to the greater difficulty of the improvement in quality of potential partners［11］.The problem with EJVs were mostly caused by no co－operation or incompetent partners，difficulties in strategic objectives between partners，and the fear of loss of control over proprietary technology and knowhow，even loss of long term competitive advantages.A mistrust of Chinese joint venture partners motivated foreign investors turn into WFOEs.At the same time，Chinese government deregulated its policies which triggered foreign investors to set up greenfield investments and acquire Chinese enterprises with great scope［11］.In the first decade of this century，WFOEs rised from 47.3%of the total FDI value in 2000 to 78.3%in 2008，dropped down 77%in 2009 and 2010 and then increased slightly to 78.6%in 2011 and 77.1%in 2012.

Based on those different issues，the paper tries to evaluate which entry mode is the most fitting for foreign investors to enter in Chinese market by comparing WFOES and EJVS，also help foreign investors to get deeper understanding of Chinese market，reduce risks and enter into Chinese market successfully.

1 Background of the company

WuChuan Oats Mill located in Inner Mongolia Autonomous Region in the north of China was founded in 1987 as a State－owned enterprise with nearly 250 employees before being an EJV.The enterprise carried out the system of a factory director in charge.This enterprise only produced oatmeal and had outdated equipment.Its annual sales volume was about RMB600，000.00 with a lower market share.

In 1998，an EJV named as Inner Mongolia Oriental Oats Mill Ltd was built up between two partners.One was Oriental Concept co.，Ltd.Malaysia.The other was WuChuan Oats Mill.The Chinese partner had 25%ownership whereas foreign partner had 75%.The EJV implemented the system of general manager responsibility under the board.A local government official was accepted as a member of the board.After establishing an EJV，foreign partner sent one expatriate，who only lived there for a few months each year and some technical staff to China for managing and training local workers in order to match up the requirement of new machinery and equipments.Within three years，the enterprise mainly produced the health－oriented foods with special recipe and unique tastes，as well as using the finest，natural ingredient.Through producing more types of oatmeal，the enterprise improved output，sales vol－ume and enlarged market share.However during the period of co－operation the existing problems between the two partners made it difficult to accomplish an estimated purpose.In this view，the foreign partner decided to buy out the 25%ownership belonging to Chinese partner.During the whole process of negotiation，the price was a big problem taking them a long time to solve.The value of the ownership was established by a certified public accountant designated by the State Administration for State－owned Assets and constituted the negotiated basis price.Finally，the Chinese partner agreed on the price offered by foreign partner through negotiation，with more‘face saving’.After that，the subsequent steps proved to be relatively smooth.To negotiate the contract，local government supervised the whole process and issued a document approving the share assignment.Until the end of 2008，the enterprise fulfilled the conversion from an EJV into a WFOE.In addition，the business license was issued shortly afterwards.

2 Data collection

The company chosen as a case study was bought out from an EJV to a WFOE in one industry，make it available to reflect the whole situation in common.The author sent emails with telephone contact to each pre－selected recipients who had agreed to take part in this interview in order to make appointments.To achieve this research，an executive officer，some senior managers and two employees are chosen as major interviewees by structured interview and in－depth interview，spend nearly one hour with each one，possible make them talking freely.The author developed a self－administered，structured questionnaire and sets up a conversation in mind with the structured interview.Further more，the author intended to‘probe’answers where interviewees could explain or build on discussion into areas which are no previously considered，but significant for understanding and helping to address research question and objectives concerned to in－depth interview with.Apart from the background information，the interview was split into 2 parts.Part A sought to as certain what factors had influenced this company to transfer business types from EJV to WFOE.Part B sought to investigate how to operate their business after becoming WFOE.During the whole process，qualitative data was obtained by face to face or telephone interviews with the notes－taking and type－recorded.

3 Interviewers response

The executive officer said，although the EJV replaced state ownership，most of the communist party members remained and were still the duty managers and middle managers of the EJV.Most of the workers came from the state－owned enterprise，the EJV may inherit the power，old ideology，original values，beliefs and practices within the organisation.Employees continued to practice their old routines；even then they refused the advanced technology and management.Lifetime employment and lifetime security had been parts of everyday life because a worker was immune to dismissal even if he failed to turn up at the workplace for a few months or made a fatal mistake causing serious losses to work unit in the stateowned enterprise.In this EJV，the local government official as one member of the board did his utmost to prevent the dismissal of employees in order to cut down on the government pressure of employment.The major purpose of accepting a government official as one member of the board is to build up the relationships with the local government and local government agencies.

Production manager said that：‘face’was regarded to be important to the worker.Protecting‘face’was proper relationship between themselves and community.Sometimes，he criticized the workers in his management；the other Chinese workers including their family members and relatives always said that he should not criticize the workers and caused them to lose‘face’.In addition，he revealed：Chinese employees did not like working a lot for the fear of making mistakes，in particular older employees would like to be given a clear introduction by the leader to participate in decision－making.Therefore the decision－making had to be made by group consensus instead of by individuals as decision－makers.During problem－solving meeting，Chinese employees usually offered no suggestions.The human resource manager was interviewed and told that recruiting the right people was very difficult.In accordance with the regulation，the EJV may select the most suitable employees from outside，either by advertising on TV，newspapers or by individual interview.However，the EJV was still not able to recruit right people if the recruit′s work unit refused to release the individual′s personnel file.Indeed，the EJV may try another way and that was to compensate the previous employer with sums of money ranging between 2 000 to 10 000 Yuan per worker，which depended on how much he or she was worth.

At present，Inner Mongolia Oriental Oats Mill Ltd is a completely WFOE in which the foreign partner has all of the ownership and full control.With the current situation of the enterprise，data has been gained by interview as follows：

（1）Re－organized－structure The enterprise have changed a few of the departments apart from adopting the system of chief executive officer responsibility under headquarters in Malaysia instead of abolishing the board and recalled the expatriate.The headquarter decided to put production，sales and promotion，market，finance and personnel into developing strategy of the group and keep the same name of enterprise.

（2）Integration of HR Reorganized original staffs.Other employees have to take up a job through competition based on free will.To some original employees，the enterprise gives them some severance pay in accordance with policy if they don′t want to compete with each other for the position.Recruit new employees from the labor market.Apart from the original 100 qualified employees，the enterprise has to recruit around 70～80 new employees from the labour market according to pre－determined sales planning.To all these new employees，the HR department carries out three weeks off－job training，which included enterprise culture，principals，production and marketing and so on.After that，all new employees have been assigned to different department for on－job skill training，take measures to remain the core talent.

（3）Set up the incentive mechanism To all core talent，the enterprise increase salaries and bonus based on two codes：salaries and bonus should be higher that the original ones and not be lower than other subsidiaries on the similar position within group.By the way，all qualified employees are satisfied with the enterprise and do their best efforts to contribute more to it.

（4）Integration of marketing With the establishment of WFOE，the sales and marketing has been absorbed to the system of the group.The enterprise continues to sale the original products in order to remain local market share and influence.In the meantime，the enterprise designs and implements an effective distribution system linking with suppler chain to end－user/retailer，explores new markets around China.Further more，the enterprise re－invests a sum of money to strengthen brand promotion and development of new products.Year after，the enterprise obtains enrich profits with higher market share.In recent years，the enterprise has developed new products and explored new markets，thereby enlarging the scope of business，going so far as to obtain huge benefits and reduce losses at lowest compared EJV（Showed in Table 1 and Table 2）.

（5）Integration of enterprise culture The enterprise re－establishes its culture related to difference background of culture and business environment，which emphases on“employee oriented，team work，contribution at good faith，reputation supremacy and quality first”and disseminated it to each employee by communicational platform and training project.Under this atmosphere the enterprise strengthen its cohesiveness，employees receive their best benefits and are proud of their enterprise.In addition，employees has known how to co－operate within a team honestly and how to control their own behaviour to contribute a lot to the enterprise.

Table 1 EJV profits Yuan

Table 2 WFOE profits Yuan

4 Results and analysis

（1）Government policy Government policy is a key instrument for foreign investors to enter into different regions and to select different entry modes.Nor is that all，it can also reflect that EJVs in China have dropped down very quickly whereas WFOEs have been in the opposite situation.Therefore，the nature of investment had converged gradually along with the change of government policy.The nature of EJVs was from highly favoured entry modes into neutral entry modes.Otherwise，the nature of WFOEs was from un－favoured entry modes into the favoured.At the same time，Chinese government deregulated its policies which triggered foreign investors to set up greenfield investments and acquire Chinese enterprises with great scope［11］.

（2）Chinese management and HR Primary research shows that Chinese management practice in an EJV has been un－suitable for them to operate their business owing to the different management styles between two or more partners and differences of ownerships.Chinese authorities would sometimes intervene with management controls on EJVs.In state－owned enterprise，there was a legacy of lax management，thus leading to poor labour discipline and reluctance of local managers to enforce discipline.These problems had still been seen from an EJV while un－seen from a WFOE.This is the extension of Confucianism in EJVs.But，it can not be denied that local Chinese partner in an EJV could help foreign partner to get quick access to the domestic market as well as gain more local knowledge and understanding of environment uncertainty.Although Chinese human resource management has been changed from the reform，EJVs in China still reflect some problems in the recruitment of employees and reward system.Also，the shortage of skilled managers has become a major problem.A WFOE could avoid these problems related to an EJV.WFOEs，with full control of the business and flexible implementation of HRM measures，may have an advantage in recruiting and incentive and retaining good staff.Owing to full control and flexibility，the enterprise solves the conflict of different management between both partners.

（3）Chinese culture Primary research indicates that Chinese culture is deeply rooted in Confucianism that effects people′s behaviour，belief and value as well as practice.According the Confucianism，protecting‘face’is viewed as the most important thing to build up in a harmonious relationship within people′s entire life and society.‘Iron rice bowl’employment in SOE makes EJVs too hard to fire unsuitable employees.The pressure of employment makes local government and Chinese partners interfere with the dismissal of employees.Employees have realized that lifetime employment and lifetime security has not existed.The enterprise has right to hire and fire employees without any interference.Being just like what an employee said：Everyone must do one′s best to work well in accordance with the rigorous regulations；otherwise，he will be fired.Many WFOEs in China attribute the success to recruit Chinese who study overseas and return homeland.

Chinese managers and employees had shown the avoidance of confrontation in the workplace.They are unwillingness to take any risk and responsibility in their jobs.Also，they are always in silence in decision－making.Group reflected the high collectivism and uncertainty avoidance on decision－making or problems solution.From the above mentioned，it reveals that differences in cultures between two partners is a bigger problem in an EJV than a WFOE.The misunderstanding of culture makes most EJVs come to an end.

（4）Supply chain management In EJV，employees are hard to find their supplies and distributors based on the old ideology，and used to do some things by following old way.As we known，supply chain management aims at achieving the optimization with minimal cost，its concerns workflow，logistics，capital flow and information flow to operate efficiently，the right products at reasonable prices，timely and accurately to consumers.After conversion of WFOE，the enterprise focuses on marketing－oriented，designs an implements an effective suppler chain to end－user/retailer in order to achieve the aim of supply chain management.The enterprise adopt vertical supply chain，which means the enterprise masters the supply of raw materials to manufacture，and then to end－user，making it possible to control the whole business process.By doing such things，the enterprise has same ownership and management without dealing with competitors of supply，enhances visibility into operations and business focus and expertise with more market－oriented strategy.

（5）Communication platform In EJV，the enterprise hasn′t had internal communication channel，employees only take their tasks by order giving，no ways to communicate their good ideas or other thinking with management.In WFOE，the enterprise set up suggestion board，intra－network and public release which enable employees to give their voice to management team freely by two way communication platform，whereas management team is promote its information or knowledge to each employee quickly.Through this channel，employees possible increase job perception and foreseeability，strength efficiency and work satisfaction，and establish peaceful working relationship，so far as to trust and respect with one another.which make employee feel they are owners of enterprise and like to contribution a lot with a good faith.Also，management easily know employees thinking and get good business ideas at first time，and make quick business decision.

5 Conclusions

With the economic boom and liberalization，China has been attracting more and more foreign investors entry into this potential market by mainly adopting EJVs and WFOEs as an entry mode.However，with the passed time，instead of EJVs，WFOEs have been favoured by foreign investors.This paper is to evaluate which entry mode is fittest for foreign investors to enter into Chinese market by comparing WFOEs and EJVs.So a theoretical discussion and investigation of real case are provided based on the method of interview around entry modes in Chinese institutional and business environment.Through doing these，major problems existed in EJVS，major advantages existed in WFOES as well as major factors influences on entry mode choice are examined.By comparing analysis of both entry modes，the author thinks that the most successful mode of entry for foreign investors into China is by entry by an EJV in the first place for a period of time，and then converge it into a WFOE.Indeed，doing things like this，the foreign investors should have a long term run in the Chinese market.

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