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After 1978 China has opened its market under the leadership of DengXiaoping to the rest of the world. With this opening it was possible for first time to  foreign investors to enter the Chinese market. In the beginning China had so-called jìngjìng tèqū 经济特区, which were economical zones created for cooperation between China and foreign investors, thus supported by the Chinese government. In these places Joint Ventures were created for several reasons (Pearson, 1991) :

Know-How Transfer :

Chinese industry lacked qualified experts in technology and management because the planned economy before did not require such expertise. The goal was to catch up to the industrialized nations.
Control of foreign investors

Joint Venture was the first form of business cooperation between China and foreign countries since 1979 after the reforms of DengXiaping. The state-owned company on the Chinese side had the obligation to enlighten the foreign partner about the conditions and rules in the Chinese market and laws. The western business partners contributed with their capital and expertise. The Joint Ventures can not run longer than 30 years. (AHK 2007)

China has continued opening its market further for foreign investors by entering the WTO in 2002. Since then Joint Ventures have gradually become unattractive for foreign investors. Instead, the so-called foreign enterprises or wàizī qǐyè 外资企业 have become more desirable for foreign investors. The most simple reason for why joint ventures are problematic is the unwanted transfer of knowledge. The foreign investors biggest fear is creating a joint venture through which they share all the knowledge until they lose control and become reluctant for the Chinese counterside, as these accumulate enough know-how to simply not need their foreign partners anymore. In simple words : the biggest threat for western business partners is the exploitation and loss of influence.

A good example is the Chinese company Pipelineman. Pipelineman acquired know-how from another German manufacturer and used it to create identical products with same logo and design. During this process Pipelineman violated several rights of the German manufacturer and conducted trademark and product-rights violations (Vietz, 2006). But since China jurisdiction differs from the jurisdiction in western societies, there is not much that can be done from the side of foreign business partners.

For that reason it is understandable that wholly foreign-owned enterprises 外资企业 have become the most desirable form of business since these business completely belongs to the foreign investors.

Three Forms of Joint Ventures In China
Contractual Joint-Venture 合作企业 :

Smallest percentage of joint ventures done with foreigners, only 2%
Equity Joint-Venture
合资企业 :

Mediocre percentage of foreign investors, 18%
Foreign Enterprise 外资企业 :

The company belongs 100% to the foreign investor or so-called "wholly foreign-owned enterprises"

 

Intellectual Property Rights In China

Chinese do not see the copying of foreign ideas, concepts, designs or counterfeiting in general as something morally questionable. These actions are often justified with the Chinese tradition of imitation. Imitation is considered as positive trait, it demonstrates the willingness to learn and shows respect to the foreign intellectual property. (Zinzius 2008)

However, China is not the only country with counterfeiting issues. Counterfeiting is a sign of an economy with a jurisdiction that is still developing. You will find counterfeits in Thailand, India, Russia and many other countries.

Social And Cultural Differences

As described in the article about China’s soft-power, Chinese differentiate between outside and inside, foreign and domestic. This thinking pattern paired with an uncontrollable nationalism persists until today. If a foreign company has a joint venture in China with a state-owned enterprise, there will be a division between own and foreign people. To earn the Chinese employers loyalty can become a huge unobtainable goal. Unlike the foreign side, the Chinese side will have the right social network (guānxi 关系) already established inside the joint-venture. As a foreign investor, if possible you should put your own people in the key positions to make sure you have trustworthy employees. Good relationships (guānxi 关系) to police and officials have much more impact than a jurisdiction process when it comes to solving conflict. Error in judgement of your power in such a social network or failure to establish one leaves you with absolutely no power when it comes to protecting your business inside China.

Conclusion

Joint Ventures are risky when done with know-how hungry partners. You should not invest in such business if you have valuable know-how to lose or you should establish reliable security-mechanisms to prevent the knowledge from being stolen.

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