Joint ventures with China not always useful

June 15, 2006, volume 36, no. 4
By Diane Luckow

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A new study on the impact of foreign direct investment in China reveals important policy considerations for governments in developing countries.

SFU assistant business professor Jing Li's study, The Impact Of Foreign Direct Investment On The Innovative Capabilities Of Indigenous Firms In Developing Countries, explores how international joint ventures are affecting local Chinese firms' capacity to innovate.

Contradicting the common belief that international joint ventures always benefit local Chinese firms, she discovered that such ventures are useful only when there is a large technology gap between the foreign and local firm. Otherwise, she says, local Chinese firms who already have some technological abilities become reliant on their partner's technology skills and are less inclined to expend effort on research and development, which then stifles their ability to innovate on their own.

Ling says governments in developing countries should adopt policies that are contingent on the local firm or industry's stage of technological development.

“International joint ventures should be encouraged only when there is a large technology gap between indigenous and foreign companies,” she says. “Once the technology gap shrinks, however, governments should relax the restrictions on foreign ownership and commit to a more open policy toward foreign direct investment in order to create a more competitive environment for indigenous companies.”

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