The StructurePerformance Relationship in a

Transitional Economy: An Empirical Study of

Multinational Alliances in China
Yadong Luo
UNIVERSITY OF HAWAII AT MANOA

Building upon the theoretical foundations provided by industrial organization, foreign direct investment, and alliance/network literature, this study
investigates the structureperformance relationship by focusing on the
international strategic alliances (ISAs) in a transitional economy. After
controlling ISAs distinctive resource and discretionary managerial decision variables, the analysis of data obtained from the Peoples Republic
of China during its pivotal time in the transitional stage finds that industry
structure characteristics constitute an important source explaining variations of ISA performance. Different structural attributes, however, affect
firm performance differently. J BUSN RES 1999. 46.1530. 1999
Elsevier Science Inc. All rights reserved.

n the never-ending search for sustained competitive advantage and superior performance, multinational corporations (MNCs) have expedited their business globalization
in recent years (Buckley and Casson, 1992). It has been argued
that MNCs can achieve higher performance than firms operating domestically, because the former benefit from the industry structure variance between the host and home country
(Morck and Yeung, 1991; Porter, 1986). It has been recognized that industry structure imperfections in foreign markets
constitute a dominant factor underlying the decision of foreign
direct investment (FDI) (Hymer, 1976; Teece, 1985) and determining the relative attractiveness of some host countries
over other host countries and the home country (Dunning,
1979). In general, empirical evidence supports the existence of
a systematic linkage between MNC performance and industry
structural variables in market economies (Caves and Mehra,
1986; Mitchell, Shaver, and Yeung, 1993).
In recent years, more and more MNCs have used international strategic alliances (ISAs) as a vehicle to access foreign
Address correspondence to Yadong Luo, Management and Industrial Relations, College of Business Administration, University of Hawaii at Manoa,
2404 Maile Way, Honolulu, HI 96822, USA.
Journal of Business Research 46, 1530 (1999)
1999 Elsevier Science Inc. All rights reserved.
655 Avenue of the Americas, New York, NY 10010

markets in pursuit of their diverse strategic objectives (Hamel,

1991; Harrigan, 1988; Kogut, 1988; Parkhe, 1993a). This
growing activity has been mirrored in strategic management
and international business research where the analysis of ISA
performance and its determinants has commanded considerable attention (Parkhe, 1991). Earlier research in the literature
has explored ISA performance and its determinants from a
variety of such angles as organizational control (Geringer and
Hebert, 1989; Killing, 1983; Yan and Gray, 1994), complementarity and collaboration (Beamish, 1987; Parkhe, 1993b),
learning access or acquisition (Hamel, 1991; Kogut and
Zandor, 1994), partnership structuring (Harrigan, 1988;
Parkhe, 1993a, 1993b), or firm characteristics such as size
and country of origin (Burgers, Hill, and Kim, 1993; Hagedoorn and Schakenraad, 1994). Although these studies have
shed light on important factors affecting ISA performance,
few researchers have investigated the underlying determinants
of ISA performance from an industry structure perspective.
This investigation is, however, critical to ISA performance,
because transnational investment inflow is a direct result of
industry structure imperfection in a host market (Hymer,
1976), and one strategic objective in forming ISAs is to enhance the accessibility to a host market, thus benefiting more
from indigenous structural imperfections (Luo, 1997). Parkhe
(1991) correctly stated that, as a key element of a partners
national context, industry structure diversity could influence
interpartner collaboration and the ISAs longevity.
Empirical studies conducted in the advanced market economy settings have led a few researchers in the literature to
link certain industry or firm structural factors with alliance
performance at the corporate level. Berg, Duncan, and Friedman (1982) demonstrate that cross-sector characteristics and
some firm level factors have a statistically significant effect on
corporate profitability. Hagedoorn and Schakenraad (1994)
provide evidence that the content of strategic linkages and the
type of industries concerned significantly influence corporate
success. Because the understanding of this issue at the business
ISSN 0148-2963/99/$see front matter
PII S0148-2963(98)00023-X

16

J Busn Res
1999:46:1530

unit level and in an international context is incomplete, this

study intends to analyze the research question at the business
unit level (i.e., ISAs) and in a host country setting. Rumelt
(1991) states that theoretical or statistical work seeking to
identify the effects involving industry structural variables for
a participating business must use the business unit, or even
less aggregate entities as the unit of analysis, because contextual factors including structural conditions have a direct impact on operations and performance of business units. Structural attributes diagnosed in this study include industry
profitability ratio, industry sales growth, industry asset intensity, growth of number of firms in an industry, and industry
structural uncertainty.
These attributes reflect an industrys major structural characteristics that influence firm operations within the industry
(Scherer and Ross, 1990). After controlling for firm behavioral
variables relating to both business strategy (e.g., R&D, advertising, and size) and investment strategy (equity, length of
operation, and country of origin), the extent of this structural
influence is likely responsible for the variations of firm performance. The control of firm behavioral variables in the model
is important and necessary, because they affect the distribution
of sales or profit within the industry. (I am indebted to an
anonymous reviewer for this insight.) The unit of analysis at
both the industry level and firm level is various ratios or
growth rates, rather than absolute amount. There is, hence,
no numerically aggregate relationship between one industrys
attribute and the combined number from all the firms within
the industry. At the industry level, we examine five structural
variables for each industry; namely, industry profitability, sales
growth, asset intensity, growth of number of firms, and structural uncertainty. At the firm level, we investigate four performance indicators, including return on investment (ROI), sales/
investment, export/investment, and risk reduction. The objective of this study is to explore the relationship between industry-level characteristics and firm-level performance in the environment of a transitional economy. The analysis of the data
containing 106 ISAs and involving 39 industries demonstrates
that there is a systematic relationship between industrial attributes and individual dimensions of alliance performance in
a transitional economy.
The unabated pursuit of reforms in transitional economies
has significantly contributed to the growing trend of the global
integration of international business. These economies in recent years have become major hosts for ISAs whose main
strategic objective, not surprisingly, is to exploit local market
structure imperfections and achieve sustained economic rents
by investing in distinctive competencies (Luo, 1995). Because
such economies constitute, to a large degree, uncharted waters
for scholars, little is known about the relative strength of this
relationship in a context where industry structure and other
dimensions of the environment differ substantially from those
in advanced market economies. Because China is emerging

Y. Luo

as the worlds fastest growing market, the present study uses

China as its analytical context.

Theoretical Framework
A widely accepted conceptual framework in industrial organization holds that structural conditions determine the behavior
and subsequent performance of a firm (Bain, 1959). In an
economy unfettered by structural imperfection of output,
profit rates across industries should fall to some equilibrium
rate reflecting the risk-adjusted marginal efficiency of capital
(Scherer and Ross, 1990). In the presence of structural imperfections, however, interindustry variations in profitability
abound, because entry barriers prevent new competition and
expanded output. In a similar vein, industry structure paradigm in the strategy literature maintains that competitive advantages and interfirm differences in efficiency cannot persist
over a long time period unless structural imperfections are
present (Porter, 1980; 1986; Teece, Pisano, and Shuen, 1991).
Porter (1986) also notes these strong industry effects on the
selection of business level strategies. A large body of research
in corporate business portfolio studies concurs to point out
the importance of industry structure variables in explaining
performance (e.g., Bettis, 1981).
From an international perspective, when industry structure
of a host country is imperfect, FDI will flow in as a direct
response if entry barriers are low (Hymer, 1976; Luo, 1997).
Firms in oligopolistic industries in the host country enjoy the
advantages of economies of scale and supply control that give
them market power (Caves, 1984)). This power allows them
to overcome the disadvantages of being foreign and to compete
with local competitors in host countries where they have FDI
facilities (Brewer, 1993). Direct investment tends to involve
market conduct that extends the recognition of mutual market
dependencethe essence of oligopolybeyond national boundaries (Teece, 1985). Likewise, it tends to equalize the rate of
return on capital (equity) broadly throughout a given industry
in all the countries where production actually takes place (Teece,
Pisano, and Shuen, 1991). This common profit rate, however,
may exceed a normal or competitive one, because persistent
oligopolynation- or worldwideis marked by various barriers to entry of new firms and, perforce, to the inflow of capital
(Caves, 1984; Teece, 1985).
MNCs entering transitional economies are likely to confront a higher level of barriers. This holds especially true for
high profitability industries that generally remain state owned
and are not undergoing privatization. To prevent foreign investors from fully controlling these industrial sectors while
encouraging them to bring in advanced technologies to modernize these sectors, host governments in these economies
often impose an equity ceiling on FDI (Buckley and Casson,
1992). As a result, foreign investors in these industries have
to use the ISA as the entry mode and the form of business
unit identity (Parkhe, 1993b). More importantly, the ISA form

StructurePerformance Relationship

can help foreign investors in all industries attain benefits from

structural imperfections of indigenous industries. Factor markets in these economies are virtually in their infancy, because
it is the government-instituted system that often controls the
allocation of relatively scarce factors in the national economy
(Luo, 1995). Under these circumstances, a local partner can
assist greatly the foreign investor in meeting the demand for
such local production factors as human resources, strategic
information, land, and raw materials. In addition, markets for
proprietary and nonproprietary know-how are far from well
established (Nee, 1992). International licensing is, thus, often
superseded by making direct investments. Because of the lack
of local networks in distributing final products made by proprietary knowledge, foreign investors often need collaboration
with local firms. These structural factors contribute to the
dominance and prevalence of the ISA as an entry mode for
FDI and the form of MNCs business unit identity in these
economies (Parkhe, 1991).
Despite great improvements in recent years, industry structure in most transitional economies remains one of the bottlenecks hampering economic development (Roman, 1986). The
main characteristics of industry structure in these economies
include the following. First, there is an immense difference
in after-tax profitability across industries, primarily because
of the long-rooted industry structure imperfections and cumbersome consolidation tax system (Luo, 1997). Second, there
is also a fundamental difference in sales growth across industries, mainly because of government industrial policy that
allows only some sectors to be decentralized and privatized
(Luo, 1995). Third, one major structural headache is that
the central governments of these economies have to control
the ownership of state firms assets, while allowing firms to
be acquired or merged by domestic or foreign investors (Child,
1994). The higher asset intensity industries, thus, are subject
to greater government interference (Rawski, 1994). In other
words, interindustry variations in asset intensity can lead to
treatment variations for firms in different industries. Fourth,
growth of the number of firms in an industry is enormously
idiosyncratic across industries. Controlling the number of new
firms established in the industry is a predominant means
for the governments to monitor the structural development
(Jefferson, Rawski, and Zheng, 1992). This entry barrier consequently leads to the heterogeneity of competition vigor in
different industries. Fifth, industry structure is highly uncertain, arising mainly from the transformative nature of the
national economy and the experimental nature of an array of
new industrial policies (Luo, 1997). These structural characteristics spur the author to select the following structural
attributes to be examined in this study. These are: (1) industry
profitability; (2) industry sales growth; (3) industry asset intensity; (4) growth of number of firms in an industry; and
(5) industry structure uncertainty.
Industry structure is partly exogenous and partly subject
to the influence of firm actions (Porter, 1980). The industry-

J Busn Res
1999:46:1530

17

based view and resource-based view both suggest that industry-specific and firm-specific factors are critical sources for
firm performance variations (Amit and Schoemaker, 1993;
Barney, 1991). Because ISAs are fairly vulnerable to the changing structural conditions in newly emerging markets, they
need to adopt realistic strategies for firm conduct. The appropriate conduct, or what the resource-based view called resource position barrier (Wernerfelt, 1984), of ISAs is particularly important for the realization of structural potentials. As
Wernerfelt states, an entry barrier without a resource position
barrier leaves the firm vulnerable to diversifying entrants;
whereas, a resource barrier without an entry barrier leaves the
firm unable to exploit the barrier. For multinational alliances,
these firm-specific conducts or competencies are often mirrored in both business strategy and investment strategy variables (Kogut and Singh, 1988; Luo and Chen, 1997). Among
the former, R&D intensity, advertising intensity, and asset size
are vital business strategy determinants commonly realized in
the strategy and alliance/network literature (Caves and Mehr,
1986; Luo, 1995). Among the latter, length of operation,
equity distribution, and country of origin are widely acknowledged as significant investment strategy elements in the FDI
and alliance/network literature (Harrigan, 1988; Kogut and
Singh, 1988; Killing, 1983). Although business strategy variables manifest a firms resource endowments in creating sustained competitive advantages, these variables, together with
investment strategy factors, largely signal a firms discretionary
managerial decisions. Indeed, those resource positions do not
suggestas some population ecologists (Hannan and Freeman, 1977) purportthat managerial decisions are irrelevant
for creating competitive advantages (Barney, 1991). For multinational alliances established in transitional economies, these
business and investment strategy decisions seem to be more
critical to both the alliances themselves and their parent firms,
because these discretionary decisions concern the deployment
of a firms strategic assets or distinctive resources in a setting
that is characterized by uncertainty, complexity, and interpartner conflicts (Amit and Schoemaker, 1993; Child, 1994). As
noted above, in diagnosing the linkage between industry structure and firm performance, it is essential to capture these
business and investment strategy variables in the model as
control variables. Figure 1 schematically exhibits the conceptual framework of this study, whereby dependent variables
(performance), independent variables (industry structure),
and control variables (business and investment strategy) are
incorporated.
Resource-based theory suggests that firms have different
types of resources (Barney, 1991), and that these resources
can be used to achieve two types of economic benefits: (1)
cooperative and strategic benefits; or (2) competitive and financial benefits (Mahoney and Pandian, 1992). For multinational alliances, according to the ISA literature, cooperative
and strategic benefits accrue from sharing highly specialized
resources that are complementary between partners (Buckley

18

J Busn Res
1999:46:1530

Y. Luo

Figure 1. Industry structure and strategic alliance performance: conceptual framework.

and Casson, 1988), and competitive and financial benefits are

achieved from increasing economies of scale, learning effect,
risk reduction, or global integration synergies (Harrigan, 1988;
Ghoshal, 1987). The benefits of different aspects yield a multidimensional ISA performance including not only accounting
return (e.g., ROI) and risk reduction, but also local sales and
export performance (see Figure 1). For a specific ISA, its
performance measurement should match with its strategic
roles. Whereas the resource-based view suggests the nature
and strength of investment resources as a determinant of ISAs
roles (Prahalad and Hamel, 1990), FDI theory stresses the
importance of host environmental conditions in determining
ISAs roles (Brewer, 1993), and ISA literature maintains the
corresponding relation between the parents strategic objectives and the alliances roles (Kogut, 1988). This study proposes that the strategic roles of the ISAs are determined by
the integration of all three factorsresources, environments,
and parents strategic objectives.

Hypotheses Development
Industry Profitability
Interindustry variance in terms of profitability has long been
an enduring characteristic of mixed and centrally directed
economies mainly caused by governmental control and intervention (Roman, 1986). One dominant characteristic of governments industrial policy in transitional economies is that
the width and depth of the removal of government-induced
asymmetries in an industry depend upon the industrys profit
level. Competitive entry by more efficient rivals as a result of
economic decentralization and privatization usually takes
place first in low-profitability industries. Hence lower-profitability industries become quicker movers toward the position
of market equilibrium in the transitional phase. On the other

hand, however, the pursuit of social stability during economic

transition necessitates state control over industries that are
strategically vital to national security and economic development. The level of before- and after-tax net income in these
industries is usually higher than that in other industries (Jefferson, Rawski, and Zheng, 1992). As a consequence, continued
government hinderance, particularly in the area of business
entry, remains in high-return industries. This interference
results in appreciable barriers to new entry and enables existing local firms and ISAs in the industry to keep their market
power and advantageous competition position. This position
is expected to have a positive impact on ISAs return on
investment and local sales.
Whenever a particular industry displays high profitability
over the years, ISAs are likely to concentrate on exploring
abnormal efficiency from a monopolistically competitive local
industry, rather than on exporting to home or international
markets. Thus, ISAs in a high-return industry are expected
to have a low export performance. Furthermore, when operating in high-profitability industries, ISAs are likely to confront more government hinderance in material supply and
products distribution, high latent competition pressure from
new rivals, and great market fluctuations, because the objective of the economic transition in formerly planned economies
is to orient the industry structure toward less disequilibrium
and greater market force determination (Rawski, 1994).
Therefore, it is proposed that ISAs operating in a high-profitability industry face more operational risks and uncertainties
than those in a low-profitability industry. Consequently:
H1: In the context of a transitional economy, industry profitability has a significantly positive influence on ISAs
return on investment and local sales but a negative
influence on ISAs export sales and risk reduction.

StructurePerformance Relationship

Industry Asset Intensity

Such industry structural traits as asset intensity surrounding
a company in the host country very greatly across different
industries, differentially affecting companies ability to enter
and operate ISAs (Parkhe, 1991; 1993b) and subsequent performance at the alliance level (Kogut, 1988; Parkhe, 1993c).
As a plausible indicator for capital requirements, industry
asset intensity constitutes a proxy for entry barriers (Scherer
and Ross, 1990). A high level of asset intensity in an industry
has also been viewed as reflecting exit barriers created by
substantial resource commitments that may not be fully recoverable (McGee, 1988). Indeed, sunk investment represents a
risk that is assumed by firms only when profitability is also
high (Bettis, 1981). In planned economies in transition, following the lifting of state-instituted price controls, entry barriers attributable to high capital requirements may increase
industry concentration and facilitate collusive pricing behavior, even in the absence of any formal collusion among firms
(Roman, 1986). As a result, ISAs in a high-asset-intensity
industry are likely to maintain a high level of ROI.
In the course of economic transition, one major dilemma
faced by the central governments lies in the control of the
ownership of state firms assets, while allowing firms to be
acquired or merged by domestic or foreign investors (Child,
1994). Thus, the higher asset intensity industries are subject
to greater government interference (Rawski, 1994). In other
words, interindustry variations in asset intensity can lead to
treatment variations for firms in different industries. However,
oligopolistic rivalry in transitional economies is played out in
an uncertain, ever-changing environment. Whereas the evolution of this environment permits managers to learn about
market conditions and competitors intentions, it also presents
the constant danger that a rival will undercut the existing
pricing structure in search of competitive advantage. Thus,
ISAs in these industries are expected to have more operational
risks. Hence:
H2: In the context of a transitional economy, industry asset
intensity has a significantly positive influence on ISAs
return on investment but a negative influence on ISAs
risk reduction.

Growth in the Number of Firms

Industry structure in transitional economies before economic
transition was characterized by high concentration (relatively
small numbers of enterprises) and by the limited freedom of
action permitted to these enterprises (Roman, 1986). This
system causes widespread poor performance in many industries. During the transitional stage, particularly in recent years,
the performance has been remarkably improved. This is the
result of increased competition and growing financial pressures that have accompanied a gradual and still incomplete
shift from a planned economy to a market economy (Luo,
1995). In industry, the transition from planned to market

J Busn Res
1999:46:1530

19

environment starts with commodities and has now begun to

penetrate the allocation of land, labor, and capital. Few firms
remain immune from competition. For example, the share of
industrial products sold through markets now exceeds 85%
in China (Rawski, 1994). ISAs have played an important role in
enhancing nationwide competition and pushing the economy
forward to the market orientation (Shan, 1991). The degree
of concentration is low and declining, and the barriers to
domestic trade are increasingly porous. It should be stated,
however, that the indicator of concentration ratio, such as
CR4 in the United States, is neither applicable nor available
in transitional economies, because the degree of inequality of
firms share in an industry does not necessarily reflect the
vigor of competition as a consequence of government intervention and the state-owned identity of leading firms (Roman).
Having decentralized many industry sectors that had been
unable to meet market demand, the number of firms in these
now-more-competitive industries has drastically grown, and
this growth constitutes a good proxy for competitive vigor in
the transitional phase (Jefferson, Rawski, and Zheng, 1992).
Wherever the vigor of competition is not reflected in the
increase in the number of firms (i.e., government-controlled
state firms still dominate the industry), ISAs are generally not
permitted to enter. Economic theory recognizes that other
things (such as the height of entry barriers) being equal,
competitive intensity is positively related to the number of
firms in the industry (Scherer and Ross, 1990). As a result
of the decentralization and privatization of many sectors in
transitional economies, entry barriers to these industries are
markedly reduced, and the number of firms including both
local enterprises and ISAs increases. These developments
boost competition in the industry, lessen the difference of a
firms profitability between industries, and slow down the
average growth rate of local sales for individual firms. Whenever a host industry seems to be highly competitive as a result
of an increase of the number of firms in the industry, ISAs
are likely to shift their focus to export in pursuit of cheap
local production factors and global internalization synergies.
Thus:
H3: In the context of a transitional economy, growth of
number of firms in an industry has a significantly
positive influence on ISAs export but a negative influence on ISAs return on investment and local sales.

Industry Structure Uncertainty

Industry structure in transitional economies is highly uncertain and dynamic, arising mainly from the transformation
nature of national economies and the experiment nature of
an array of new industrial policies (Nee, 1992). The fluctuations of price, sales, material supply, and, last but not least,
policies of the host government are all considerably high.
Information imperfection in these economies compounds the
structural uncertainty which, other things being equal, in-

20

J Busn Res
1999:46:1530

creases the operational risks of ISAs (Yan and Gray, 1994).

In this situation, no single firm can readily escape the risks
of changing rules and their consequences. According to the
ISA theory, international alliances can reduce the vulnerability
to local industry structure uncertainty by minimizing the reliance on local settings (Killing, 1983). In an effort to do so,
foreign partners can either increase the control over alliance
operations or decrease the portion of local purchasing and
local marketing (Buckley and Casson, 1992). Thus, it can be
hypothesized that when the local industry structure is unstable
or turbulent, ISAs are more likely to concentrate on export
sales. Therefore:
H4: In the context of a transitional economy, industry
structure uncertainty has a significantly positive influence on ISAs export, but a negative influence on ISAs
risk reduction.

Industry Sales Growth

In transitional economies, a fundamental difference in sales
growth across industries abounds, mainly because of government industrial policy, which allows only some sectors to be
decentralized and privatized (Roman, 1986). Industry sales
growth represents a key component of market attractiveness
for both local firms and ISAs. Growth has served as an indicator of disequilibrium, a condition favorably associated with
entry, and as an indicator of industry evolution (Bain, 1959).
Porter (1980) argues that rapid industry growth ensures that
incumbents can maintain a strong financial performance, although new entrants take some market share. In planned
economies in transition, when a sector is undergoing transition
or has been privatized, thus freeing from government control
over market supply, a rapid initial development will usually
ensue (Jefferson, Rawski, and Zheng, 1992). This take-off is
reflected in a surge in industry sales growth, which is, in turn,
mirrored in the sales growth of ISAs in the industry. However,
when the local market for a particular industry seems to grow
dramatically, it is reasonable to expect that ISAs will pursue
local market expansion rather than export growth (Caves and
Mehra, 1986). Although governments in transitional economies provide preferential treatment to foster ISAs export, the
motivations of many ISAs often conflict with those of the host
governments (Luo, 1995). It is observed that multinational
alliances in these economies tend to place their strategic focus
on seeking market expansion in local fast-growing industries
(Beamish, 1987). Following the line of reasoning above, the
last hypothesis states:
H5: In the context of a transitional economy, industry sales
growth has a significantly positive influence on ISAs
return on investment and local sales but a negative
influence on ISAs export.

Y. Luo

Research Methods
ISAs in China: Type and Definition
Foreign investors are free to opt for an ISA or a wholly owned
subsidiary (WOS) as an entry mode to make direct investment.
Although the WOS category has been growing in recent years,
the ISA remains dominant and accounts for 73.55% of total
FDI value in 1994 (Bulletin, 1995). According to the Chinese
governments classifications, these ISAs include the following:
(1) equity joint ventures (EJV), which involve the creation of
limited liability companies with equity and management
shared in negotiable proportions by the foreign and Chinese
partners; (2) contractual (or cooperative) joint ventures (CJV),
which refer to a variety of arrangements and are looser associations of partners (although they may still involve establishment
of a limited liability company) that agree to pursue a joint
undertaking. The Chinese and foreign partners cooperate in
joint projects or other business activities according to the
terms and conditions stipulated in the ventures agreement.
Technology transfer and long-term licensing agreements are
also included in this type; (3) joint exploration projects (e.g.,
offshore oil exploration consortia) in which the exploration
costs are borne by the foreign partner, with development costs
later shared by a Chinese entity. Although such arrangements
allow foreign firms to manage projects, this type of alliance
does not result in the establishment of new limited liability
enterprises. Among all types of ISAs, equity and contractual
joint ventures predominate and account for 97.52% of total
investments of ISAs. This research, therefore, focuses on equity
and contractual joint ventures. It would be a worthy effort to
examine whether the form of alliance modifies the relationship
between industry structure and ISA performance. This issue
needs to be taken up by future research.

Data Collection
Industry data were collected from four consecutive editions
of China Statistical Yearbook (industry section), compiled by
the State Statistical Bureau, the Peoples Republic of China,
covering the years 1988 through 1991. Of the total 51 industries in the nation, the sample firms of this study operate in
39 different industries. The number of ISAs in each of these
industries range from 1 to 12. Overall, more ISAs invest and
operate in such industries as sewing (12), leather, furs and
related products (9), daily use electronics apparatus (8), textile, especially silk and woolen (7), plastic (6), rubber (5),
building materials (5), daily use chemical products (4), and
food processing (4), to name a few. For the descriptive statistics of industry structural attributes, please refer to Table 1 and
Appendix 1.) This time frame lies in the middle of economic
transition in the country. The descriptive statistics (growth
rate) of all industries structural attributes, such as number of
firms, net output, sales revenue, fixed assets, before-tax profit,
and after-tax profit, are detailed in the Appendix. The mean

StructurePerformance Relationship

and standard deviation of each structural attribute across industries are also provided. To offer some dynamic insights
into these attributes, various growth rates for a more recent
period, 19901993, are also presented.
The firm-specific financial data regarding ISAs in China are
available only from the local authorities, such as commissions
of foreign economic relations and trade, foreign exchange
administrations, and taxation bureaus. In this study, crosssectional data for 106 ISAs operating in manufacturing industries from 1988 through 1991 in Jiangsu Province were obtained from the Provincial Commission of Foreign Economic
Relations and Trade. Based on an estimated 2 years time
lag from formation to operation for ISAs in China (National
Council, 1991), this study focuses on those ISAs formed as
of the end of 1986. Among a total of 277 EJVs established in
the province by this time, 98 were left after deduction of the
number of discontinued alliances before 1988, the number
of those investing in nonmanufacturing sectors and the number of those invested by multiple partners (>3). (Considering
the heterogeneity of structure attributes between these sectors
and industry sectors, this study is not designed to examine
the relations of service and agriculture sectors structure to
firm performance. It would be a worthy effort, however, to
explore this issue, because many foreign investors, particularly
Asian multinationals, have recently oriented toward the service
sector, and the Chinese government encourages FDI in the
agriculture sector during its ninth 5-year plant period. This
issue needs to be taken up by future research.) Among a total
of 32 CJVs and joint exploration projects in manufacturing
sectors and involved single local-single foreign partners in the
province by the end of 1986, only eight had created new legal
entities and submitted financial statements to the Commission.
As a result, a total of 106 cross-sectional ISAs are included
in the sample. The data about relevant financial figures pertaining to performance and three business strategy variables
were obtained from the balance sheets and income statements
that ISAs submitted to the above Commission. These statements were audited by independent certified public accountants before they were submitted. Researchers in Chinese joint
venture studies have demonstrated that alliances or ventures in
Jiangsu province are highly representative of those nationwide
(e.g., Luo, 1997). Jiangsu now ranks second in China in terms
of GDP and FDI absorption. The policies, rules, and measures
adopted in the province vis-a`-vis FDI have been widely applied
elsewhere in the country. ISAs investment information including length of operation, equity distribution, and country of
origin of investment was obtained from the Directory of Foreign-Invested Enterprises in Jiangsu Province (1992 Edition),
compiled by the above Commission.

Variable Measurement
DEPENDENT VARIABLES. Two specific considerations guide
the selection of appropriate ISA performance measures in this

J Busn Res
1999:46:1530

21

study. First, because all single measures have drawbacks, and

no single measure can capture the diverse goals of ISAs, multidimensional performance measures should be used. Second,
the performance measurement must be in harmony with the
strategic objectives of foreign investors and corresponding
roles of subsidiaries. In the FDI literature, the commonly
accepted objectives of foreign parent firms and corresponding
roles of subsidiaries include efficiency, market growth, costminimization (via export), and risk reduction. Based on the
above criteria, four measures are finally selected and used in
this study. They are return on investment (ROI), local sales/
investment, export/investment, and operational risk. Although
they are related, these measures reflect idiosyncratic aspects
of alliance performance. Whereas ROI is the most widely used
ratio to measure investment profitability (Killing, 1983), risk
measure is the primary indicator to assess investment stability
(Kobrin, 1982). Moreover, whereas local sales/investment reflects investment turnover within the host market, export/
investment mirrors investment turnover outside the host market (Luo, 1997). This study defines local sales or export as a
percentage of total investment rather than total sales (local
sales 1 export). The logic behind this is twofold. First, using
total sales as a denominator to define local sales or export can
reflect only the structure or orientation of sales (local sales
vs. export), not actual performance. Two firms may have the
local sales percentage in total sales, but the real value of local
and total sales could be substantially different between the
firms. Second, using total investment as a denominator can
control the investment size effect in an ISAs market expansion.
In fact, this computation indicates a firms investment turnover
(similar to asset turnover) in local and international settings.
This study measures the operational risk by computing the
geometric average of standard deviations of ISA performance
measures {i.e., [STD(ROI) 3 STD(SALE) 3 STD(EXPORT)]1/3}.
In essence, this index is equivalent to the accounting-based
risk calculation used in the strategic management literature
(Bettis, 1981). Because the result of multiplying of the standard
deviations of performance measures could be very large for
observations in a highly dynamic environment, this study
uses the geometric average instead of simple multiplication
of performance variations. Market-based risk measure, namely
systematic risk or beta, is usually estimated using an ordinary
least-squares regression of the form: Rjt 5 aj 1 bjRmt 1 ejt,
where Rjt is the return on the security of firm j on day t, and
Rmt is the equally weighted market return on that day. Because
the number of ISAs listed in the Chinese stock exchanges is
exceedingly small (no sample firm in this study has been listed
in the exchanges), and foreign investors are even subject to
restrictions in purchasing the so-called B shares (common
stocks denominated in foreign currencies) of the existing joint
stock companies, stock market-based measurement of risk is
neither appropriate nor available in a Chinese case study. As

22

J Busn Res
1999:46:1530

a result, this study employs accounting-based risk measurement to reflect a firms operation variability.
Industry profitability is measured
by an industrys ROA computed by the industrys total aftertax profits divided by total assets in the industry. According
to the Chinese industry accounting system, total assets are
composed of circulating assets (different from current assets
defined by the U.S. Generally Accepted Accounting Principles
(GAAP)) and fixed assets, and the amount of circulating assets
always equates with that of circulating funds (the former are
treated as the so-called capital application; whereas, the latter
are viewed as capital source). As a result, the value of total
assets of an industry was obtained by adding fixed assets and
circulating funds of industry, with both figures provided by
the China Statistical Yearbook. When an ISA involves multiple
industries, the profitability of industry i in which the ISA
participated is multiplied by the proportion of firm sales in
the industry (Pi) and aggregated for the firm as follows:
INDEPENDENT VARIABLES.

Industry profitability (INDPRO) in year t 5 R ROAitPit

Industry sales growth is calculated using compound growth
rate (3-year compound covering 1988 through 1991). In case
an ISAs business lines are pertinent to multiple industries,
the sales growth of industry in which the firm participated is
multiplied by the proportion of alliance sales in the industry
and aggregated for the ISA as follows.
Industry sale growth (INDSAG) 5 R {[(1 1 Rit1)
(1 1 Rit2)(1 1 Rit3)]1/3 2 1}Pi
Where Ri denotes annual sales growth compared to the previous year in industry i, and Pi stands for the average percentage
of an ISAs sales in industry i during the period 1988 through
1991.
Industry asset intensity is measured by the net value of fixed
asset (i.e., depreciation had been deducted) in the industry. It
is a summary measure weighted to reflect an ISAs relative
sales in different industries Pi as follows:
Industry asset intensity (INDASS) in year t 5 R INDASSitPit
The Yearbook reveals the growth in the number of firms in
each industry, which includes both local Chinese firms and
foreign-invested enterprises. In a similar way, it is a summary
measure of compound growth rate weighted by firms relative
sales in different sectors during the period Pi as follows:
Growth in the number of firms (INDNUM)
5 R {[(1 1 rit1) (1 1 rit2)(1 1 rit3)]1/3 2 1}Pi
Where ri is the annual growth rate of the number of firms
compared to the previous year in industry i.
Industry structure uncertainty is measured by the geometric average of standard deviations of all other structural variables examined in the present study {i.e., [STD(INDPRO) 3
STD(INDSAG) 3 STD(INDASS) 3 STD(INDNUM)]1/4}. Following the practice for the other variables, when the ISA

Y. Luo

activities span multiple industries, this variable is weighted

by the proportion of ISA sales in the industry.

Control Variables
As noted above and shown in Figure 1, this study statistically
controls relevant business and investment strategy factors in
examining the relationship between industry structure and
ISA performance. In other words, we want to see the influence
of industry structural attributes on firm performance when
the effect of other relevant factors is eliminated. These factors
must be controlled in the test, because they are likely to
influence ISA performance (Luo, 1995; Rumelt, 1991). Industry
structural variables are not the only factors underlying the success of ISAs (Parkhe, 1993b). Business and investment strategy
variables may influence the firms ability to compete against
foreign or local rivals, thus affecting distribution of economic
rents within the industry (Scherer and Ross, 1990).
Among business strategy variables, R&D intensity is recognized as a major contributor to product differentiation and a
primary component of firm competence (Porter, 1980), and
thus is likely to positively influence firm performance (Caves
and Mehra, 1986). Hagedoorn and Schakenraad (1994) and
Berg, Duncan, and Friedman (1982) demonstrate that a strategic alliances performance is affected by the expected strategic
importance of its R&D intensity. Second, advertising helps to
create product differentiation, to improve brand image, and
to enhance market power (McGee, 1988). Scherer and Ross
(1990) and Chauvin and Hirschey (1993) provide evidence
that advertising has a favorable effect on firm performance.
Third, a great asset size enhances a firms economy of scale
or scope and its ability to overcome entry barriers stemming
from capital requirement and minimum efficient scale (Bain,
1959). The size of foreign investment projects is an important
factor affecting the mode of entry and subsequent firm performance (Kogut and Singh, 1988). Firm size also reflects the
degree to which firms actively seek and find external opportunities in strategic linkages (Hagedoorn and Schakenraad). In
this study, the intensities of R&D and advertising are measured
relative to an ISAs sales, and firm size is measured by total
assets (in million dollars).
Among investment strategy variables, an ISAs equity distribution could affect its ability and propensity to influence
contextual factors including structural elements, because sharing arrangement influences bargaining power vis-a`-vis a local
partner, extent of control over the ISA, and degree of local
dependence (Harrigan, 1988; Parkhe, 1993c; Yan and Gray,
1994). Second, FDI theory maintains that the positions of
dissimilar nations in the investment sequence will improve as
investors become more knowledgeable about local conditions
through direct experience (Davidson, 1980). As a proxy of
learning and experience, length of operation may influence
ISAs path or extent of competitive success. Third, country of
origin of investment affects the cultural distance between
home and host countries (Buckley and Casson, 1992) and the

1.00
0.04
1.00
0.08 20.15 1.00
0.23* 20.07 0.15 1.00
1.00
0.21*
0.16
0.15
0.20*
1.00
0.29**
1.00
0.19* 20.25** 1.00
0.24** 20.10
0.11
0.12
20.05
0.31***
0.07
0.04
0.07
0.10
0.20* 0.17
0.12
0.17
0.23*
1.00
0.11
0.10
0.28**
0.13
0.37***
20.04
0.09
0.21*
13.33 7.36 1.00
41.53 17.02 0.74***
1.00
9.01 11.22 0.26** 20.20*
3.06 4.12 0.21*
0.30**
3.48 3.35 0.40***
0.33***
22.97 9.05 0.33***
0.34***
24.78 15.29 0.24**
0.05
2.57 4.32 0.28**
0.32***
7.22 8.37 0.15
20.14
6.38 2.97 0.09
0.23*
5.42 2.03 0.21*
0.28**
4.79 4.19 0.12
0.08
7.28 1.48 0.22*
0.26**
34.44 8.08 0.15
0.10
0.44 0.49 0.08
0.17
ROI
SALE
EXPT
RISK
INDPRO
INDSAG
INDASS
INDNUM
INDUNC
R&D
ADS
SIZE
LENGTH
EQUITY
ORIGIN
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.

* p , 0.05; ** p , 0.01; *** p , 0.001.

4
3
SD

2
Mean
Variable

Table 1. Descriptive Statistics and Correlation Coefficient (N 5 106)

Results and Discussion

1.00
0.05
0.54***
0.40***
0.28**
0.40***
0.08
0.10
0.06
0.16

10

11

12

13

14

15

correlation between home and host market structures (Brewer,

1993). It also influences the integration of home countryspecific skills or competence with host country-specific ones
(Hamel, 1991) and the degree of financial synergies attributable to different currency and dividend policies (Morck and
Yeung, 1991). We define the operation length and equity
distribution by the number of operation years in China and
equity percentage (%) owned by a foreign investor, respectively. Country of origin of investment is measured by a
dummy variable (1 from developed countries, 0 from developing countries).

We first conducted the analysis of variance (ANOVA) test

under the general linear models (GLM) procedure for the
proposed relationship between structural characteristics and
ISA performance. The test, however, indicated that some industry structural variables reveal high standard errors (.0.5),
suggesting that the data were not well conditioned (SAS, 1990,
p. 1211). Accordingly, the ORTHOREG regression method
was used to analyze the effect of industry structural attributes
on ISA performance. The ORTHOREG procedure performs
linear least-square regression using the GentlemanGivens
computational method. It produces substantially more accurate estimates than other regression approaches when estimates have very high standard errors (SAS, p. 1212). This
procedure reports the raw regression coefficient as well as
t-ratio for each parameter under regression. It is customary
to report t-ratios instead of raw coefficients in ORTHOREG,
because the former are more meaningful (raw coefficients
divided by standard errors). Because t-ratios and standard
errors are both reported in Table 2, regression coefficients
can be easily obtained (t-ratio 3 STD error). To ensure the
validity of the regression, multicollinearity was diagnosed by
examining the variance inflation factors (VIF) for independent
variables. The result revealed that the VIF values ranged from
1.17 to 1.86, thus indicating little threat of multicollinearity
(Neter, Wasserman, and Kutner, 1989). These values and the
ORTHOREGs raw coefficients are available from the author.
To assess the multivariate effect of structural attributes an
overall performance of ISAs, a multivariate analysis of variance
(MANOVA) test was also conducted. Because MANOVA requires that the criterion variables be correlated (Hair, Anderson, Tatham, and Black, 1995), the appropriateness of the
multivariate technique was validated by a test for sphericity.
The test (Mauchlys criterion 5 0.51, x2 5 54.06, p , 0.001)
indicated that the data have a Type H covariance structure
for the criterion variables, suggesting that MANOVA is appropriate for analyzing the data. The combination of the ORTHOREG and MANOVA can present both univariate and
multivariate effects of a specific attribute of industry structure
on multifaceted performance of ISAs.
The examination demonstrates that industry profitability

23

J Busn Res
1999:46:1530

1.00
0.09
1.00
20.20*
0.19*
1.00
20.25**
0.14
0.41***
20.22*
0.16
0.08
20.21*
0.25**
0.49***
0.07
0.42***
0.35***
20.13
0.19*
0.21*
20.13
0.16
0.20*
0.11
20.16
0.32***
0.14
20.25**
0.05
20.11
20.21*
20.08
20.28**
0.19*
0.10

StructurePerformance Relationship

24

J Busn Res
1999:46:1530

Y. Luo

Table 2. The Relationship Between Industry Structure and ISA Performance: The ORTHOREG and MANOVA Analysis
Variables

ROI

Intercept

20.81
(0.15)

Independent variables
INDPRO
INDSAG
INDASS
INDNUM
INDUNC
Control variables
R&D
ADS
SIZE
LENGTH
EQUITY
ORIGIN
Sum of squared errors
Degree of freedom
Mean squared error
Root-mean-square error
R-square

Univariate Effect
SALE
EXPT

RISK

2.97**
(0.17)

1.43
(0.25)

2.78**
(0.49)
3.11**
(0.11)
1.71
(0.10)
2.01*
(0.08)
0.97
(0.13)

5.41***
(0.53)
1.88
(0.18)
0.82
(0.25)
2.26*
(0.38)
21.57
(0.55)

22.42*
(0.08)
21.73
(0.56)
22.09*
(0.14)
21.68
(0.56)
1.26
(0.10)

0.34
(0.06)
1.27
(0.09)
0.73
(0.06)
2.16*
(0.15)
1.24
(0.02)
0.55
(0.06)

1.83
(0.18)
2.10*
(0.12)
0.61
(0.08)
1.89
(0.10)
1.06
(0.01)
1.12
(0.02)

20.58
(0.23)
20.79
(0.40)
1.18
(0.08)
1.06
(0.06)
20.83
(0.09)
21.69
(0.11)

1.44
(0.08)
1.25
(0.07)
20.99
(0.07)
22.31*
(0.13)
21.77
(0.06)
1.01
(0.05)

48.22
94
0.51
0.72
0.65

38.11
94
0.41
0.64
0.77

55.60
94
0.59
0.78
0.61

45.58
94
0.48
0.70
0.70

Multivariate Effect
Wilks l
F

2.38*
(0.20)
2.15*
(0.22)
1.31
(0.44)
1.76
(0.12)
1.17
(0.23)
3.60***
(0.66)

0.84

3.41**

0.89

3.08*

0.94

1.44

0.91

2.24

0.90

2.46*

0.94

1.36

0.94

1.42

0.97

0.58

0.88

3.15*

0.96

0.79

0.96

0.70

p , 0.10; * p , 0.05; ** p, 0.01; *** p , 0.001.

The entries in the table (univariate effect) are t Ratios (i.e., regression coefficients divided by their standard error) and their significance levels (two-tailed). The numbers in parentheses
are standard errors.
The SAS model for this analysis can be described as: Yn 5 R Xi 1 R Cm, where Yn stands for four performance dimensions, Xi represents five structural attributes, and Cm refers to
various control variables. The multivariate test was conducted based on one integrated model in which all the predictor and control variables are incorporated at one time.

(INDPRO) affects ISAs overall and unidimensional performance at a significant level. As shown in Table 2, the multivariate effect of industry profitability on firms overall performance
is statistically significant (F 5 3.41, p , 0.01). The ORTHOREG test suggests that this structural variable has a significantly positive influence on ISAs return on investment (t 5
2.78) and local sales (t 5 5.41) and a strong but negative
impact on ISAs export (t 5 22.42) and risk reduction (i.e.,
positively related to risk, t 5 2.15), H1 is, hence, supported.
The above evidence suggests that industry profitability in
a transitional economy vigorously affects all the major dimensions of alliance performance and has a heterogenous direction
according to the dimension considered. The significant linkage
between industry profitability and ISA performance in China
demonstrates that Porters notion (1986) that industry attractiveness constitutes a major source explaining variations of
firm performance, can be extended to foreign businesses op-

erating in the transitional economy context. The trade-off

between efficiency and risk reduction and between local market expansion and export performance supports a theoretical
tenet in the ISA literature that ISA performance evaluation
should correspond to the alliance roles prestipulated by parent
firms (Davidson, 1980).
Although industry asset intensity (INDASS) is not found
to have multivariate effect on ISAs overall performance, it is
systematically linked with some dimensions of alliance performance. As revealed in Table 2, industry asset intensity has a
significant and positive influence on firms ROI (t 5 1.71)
and a noticeably negative effect on firms risk reduction (t 5
1.76). H2 is, thereby, supported.
The above result suggests that ISAs operating in a high
asset-intensity industry have a higher performance in ROI,
but a lower performance in export and risk reduction than
those operating in a low-asset industry. This finding, based

StructurePerformance Relationship

on a transition economy context, is consistent with the observations by Bettis (1981) and McGee (1988) for firms in developed market economies, that asset intensity or capital requirement is positively correlated with firms profit levels. The
unexpected negative relation between asset intensity and export sales suggests that, by contributing their distinctive resources to local capital- or technology-intensive industries,
ISAs manifest their commitment to indigenous production
and host market expansion. It remains to be seen, however,
if this relation will change in the long run, because export
success is likely to follow whenever market supply surpasses
market demand in the host country. This study leaves this
question as an agenda for future research.
Table 2 provides striking evidence contradicting our prediction: growth of number of firms in an industry (INDNUM)
is positively, rather than negatively, related to ISAs ROI (t 5
2.01) and local sales (t 5 2.26) at a significant level (p , 0.05).
Moreover, contrary to the stated hypothesis, this structural
variable is found to have a negative influence on firms export
performance (t 5 21.68). H3 is thereby rejected.
Previous studies in industrial organization research based
on developed market economies observe that the higher the
growth in the number of firms in an industry, the lower their
economic efficiency, other things being equal (Phillips, 1976).
In contrast, findings of the present study indicate that, in a
planned economy in transition, high growth in the number
of firms in a particular industry signals industrial growth rather
than increase in competition once the numerous government
interventions are eliminated. Under these circumstances, a
greater number of entrants would plunge into the industry
in search of abnormal economic returns. It seems that newly
emerging economies are aptly named, because the explosion
in the number of participants in newly competitive industries
does not exhaust its potential. To truly appreciate the significance of this finding, it may be necessary to test the robustness
of the relationship over time. The rapidly expanding Chinese
economy together with the existence of pent-up demand, long
stifled by ideologically based government interventions, may
help to explain the inability of producers in newly competitive
industries to exploit market possibilities fully.
The evidence above also suggests that when a specific industry seems to prosper in a transitional economy, most firms,
whether local or foreign, will enter the industry to seek abnormal rents rather than to pursue high export performance. This
conclusions is consistent throughout the findings of this study.
The pursuit of indigenous market expansion at the expense
of export whenever a local industry seems flourishing indicates
that industry structure is a key lever in balancing the global
integrationlocal responsiveness relations (Doz and Prahalad, 1991) for diversified MNCs.
Industry structure uncertainty (INDUNC) is found to be
important for ISAs overall performance according to the test
result (F 5 2.46, p , 0.05). Table 2 also presents that industry
structure uncertainty is positively related to operational risk

J Busn Res
1999:46:1530

25

at a significant level (t 5 3.60). However, inconsistent with

our hypothesis, statistical evidence demonstrates that there is
no significant linkage between structure uncertainty and ISAs
export performance. Based on the above findings, H4 is partly
supported.
Industrial organization literature maintains that there is no
necessary causality between industry uncertainty and operational risks facing firms, because a firms capability and aptitude in risk reduction may outweigh the requirement for
hedging contextual uncertainties (Scherer and Ross, 1990).
The above evidence, however, demonstrates that this assertion
does not apply to the Chinese situation where firms risk is
found to be a positive function of structural uncertainty. In
transitional economies, structural uncertainty can often be
traced to governments direct hindrance in such areas as material supply, distribution control, and financing arrangement,
among others. This type of risk is more difficult to avoid or
is even inavertable, because it is of a political or sovereign
nature (Kobrin, 1982).
This study finds no systematic connections between structural uncertainty and export performance. Indeed, with over
15 years of experience, many MNCs no longer consider China
a frontier. The accumulated learning and experience effect
changes their attitude toward more risk taking. Their distinctive competencies and global internalization advantages
strengthen their risk-taking propensity. Under these circumstances, a strategy based solely on exporting is replaced by
the pursuit of long-term efficiency growth and local market
expansion.
As revealed in Table 2, industry sales growth (INDSAG)
has a significant multivariate impact on ISAs overall performance (F 5 3.08, p , 0.05). The study also observes that
industry sales growth is significantly and positively associated
with ISAs return on investment (t 5 3.11) and local sales (t 5
1.88) but negatively related to alliances export in a significant
fashion (t 5 21.73). H5 is, therefore, supported. This finding
demonstrates that ISAs operating in China attain economic
rent from local industry sales growth, participating in the local
expansion at the expense of exports. When domestic industry
conditions are unfavorable, ISAs strategic aim will necessitate
cost minimization and will be reflected in the high performance of exports.
Among control variables, R&D intensity (R&D) and advertising intensity (ADS) are found to have a positive influence
on ISAs local sales. Nevertheless, they are not associated with
other individual dimensions of performance (Table 2). Asset
size (SIZE) is not found to be significantly related to either
unidimensional or overall performance of ISAs. According to
the same tests, an ISAs length of operation (LENGTH) has a
profoundly favorable influence on its overall performance (F 5
3.15, p , 0.05) as well as its ROI (t 5 2.16) local sales (t 5
1.89), and risk reduction (t 5 22.31). Indeed, a greater length
of ISA operation in a planned economy in transition enables
the firm to attain the advantages of earlier timing of entry and

26

J Busn Res
1999:46:1530

those of the learning curve. Equity distribution (EQUITY)

is negatively associated with operational risk (t 5 21.77),
suggesting that the higher the percentage of equity ownership
by a foreign investor, the lower the operational risk facing the
ISA in which it participates in a transitional economy. This
evidence confirms that a foreign subsidiarys exposure to, and
interdependence with, local environmental uncertainties are
a decreasing function of the parent firms equity control over
the subsidiary (Killing, 1983; Shan, 1991). Finally, country
of origin of investment (ORIGIN) is not found to have a
significant impact on either overall or individual dimensions
of performance except export sales (t 5 1.69). This suggests
that developing country investors tend to focus more on export
market relative to developed country investors.

Conclusion
This study explored the industry structureISA performance
relationships in the transitional economy context (Peoples
Republic of China). The major findings suggest that structural
variables in the Chinese economy have not only a significant
influence on ISAs overall performance, but a strong impact
on several aspects of alliance performance in the country. The
evidence from China supports Porters notion (1980, 1986)
that industry attractiveness constitutes a significant source
explaining variations of firm performance.
Overall, this study revealed some similarities in the structureperformance relationship between a transitional economy and advanced market economies with respect to such
structural variables as industry profitability, industry sales
growth, and industry asset intensity. Nevertheless, in two
areas the relationship diverges according to the context.
First, whereas marketeconomy-based studies found that
the growth in the number of firms in an industry was negatively related to firms accounting return and market growth
(Phillips, 1976), this study observed a positive function for
the relation. Indeed, when government-instituted control over
industry supply was lifted during a transitional phase, high
growth of number of firms in an industry seemed to signal
industry growth rather than simply increased competition. In
other words, it seems that emerging economies are aptly
named, because the explosion in the number of participants
in newly competitive industries does not exhaust its potential.
Growth continues unabated, and the swelling wave carries
new entrants as well as established firms. To truly appreciate
the significance of this findings, it may be necessary to test
the robustness of the relationship over time. The rapidly expanding Chinese economy together with the existence of a
pent-up demand, long stifled by ideologically based government interventions, may help explain the inability of producers in newly competitive industries to exploit market possibilities fully. The major question is whether this phenomenon is
ephemeral in nature and, thus, time- and place-specific, or
whether it points to a fundamental divergence that is yet

Y. Luo

to be fully understood. The answer could be disclosed only

following additional tests in China at a later stage or in other
economies in transition.
Second, whereas market economy-based studies found that
there was not necessarily a causality between industry structure uncertainty and operational risks facing firms (Scherer
and Ross, 1990), this study showed a positive relationship
between the two, implying that macroenvironmental factors
outweigh microfirm characteristics in an economy in transition. As has been suggested earlier, this may derive from
the nature of industry structure uncertainty. If, as it is very
probable, uncertainty is attributable mostly to the government
policies, no single firm can escape the risks of changing rules
and their consequences. It remains to be seen whether the
association of industry structure uncertainty with operational
risks will be sustained over time. Indeed, over the last few
years, the Chinese government relinquished control over a
growing number of industries. Eventually, as the transition
toward a market economy is completed, public policy may
cease to be a source of uncertainty. However, this remains an
open question that must be substantiated by future research.
Several limitations of this research should be taken into
consideration when interpreting the findings and should be
addressed in future research. First, the sample firms studied
here might not be fully representative of all ISAs in China.
To truly appreciate the robustness and generalizability of the
empirical results reported here, future work must incorporate
larger size and more representative samples and must investigate the applicability of the model to other transitional economies. Second, the time frame used in this study might not be
able to reflect fully what is happening today in China. More
valuable insights into the dynamic relationship between industry structure and ISA performance can be gained from additional studies that build upon more recent data and trace
structureperformance link over time. Taking this study as
a point of departure, future research should be devoted to
longitudinal assessment of this link. To do so, the process
approach is needed as both industry structure and alliance
operations evolve along a life cycle (Parkhe, 1993c). It would
be interesting to see whether there is a life cycle stage fit
between industry development (introduction, growth, maturity, and decline) and alliance development (formation,
growth, maintenance, and dissolution) in emerging markets.
It would also be desirable to test the effect of such a fit or
misfit on the financial and operational outcomes of ISAs. These
questions are proposed as an agenda for future research.

References
Amit, R., and Schoemaker, P. J. H.: Strategic Assets and Organizational Rent. Strategic Management Journal 14 (1993): 3346.
Bain, J. S.: Industrial Organization, Wiley, New York. 1959.
Barney, J.: Firm Resources and Sustained Competitive Advantages.
Journal of Management 17 (1991): 99120.

StructurePerformance Relationship

Beamish, P. W.: Joint Ventures in LDCs: Partner Selection and Performance. Management International Review 27 (1987): 2337.
Berg, S. V., Duncan, J., and Friedman, P.: Joint Venture Strategies and
Corporate Innovation. Oelgeschlager, Cambridge, MA. 1982.
Bettis, R. A.: Performance Differences in Related and Unrelated Diversified Firms. Strategic Management Journal 2 (1981): 379393.
Brewer, T. L.: Government Policies, Market Imperfections, and Foreign Direct Investment. Journal of International Business Studies 24
(1993): 101120.
Buckley, P. J., and Casson, M. C.: The Theory of Cooperation in
International Business, in Cooperative Strategies in International
Business, F. Contractor, and P. Lorange, eds., Lexington Books,
Lexington, MA. 1988, pp. 2847.
Buckley, P. J., and Casson, M. C.: Multinational Enterprises in Less
Developed Countries: Cultural and Economic Interactions, in
Studies in International Business, P. J. Buckley, ed., St. Martins
Press, New York. 1992, pp. 118.
Bulletin: The Bulletin of the Ministry of Foreign Trade and Economic
Cooperation of the Peoples Republic of China. Issue no. 2, 1995.
Burgers, W. P., Hill, C. W. L., and Kim, W. C.: A Theory of Global
Strategic Alliances: The Case of the Global Auto Industry. Strategic
Management Journal 14 (1993): 419432.
Caves, R. E.: Economic Analysis and the Quest for Competitive
Advantage. American Economic Review 74 (1984): 127132.
Caves, R. E., and Mehra, K.: Entry of Foreign Multinationals into
U.S. Manufacturing Industries, in Competition in Global Industries
M. E. Porter, ed., Harvard Business School Press, Boston, MA.
1986, pp. 2139.
Chauvin, K. M., and Hirschey, M.: Advertising, R&D Expenditures,
and the Market Value of the Firm. Financial Management 22
(1993): 3348.
Child, J.: Management in China During the Age of Reform. Cambridge
University Press, Cambridge, UK. 1994.
Davidson, W. H.: The Location of Foreign Direct Investment Activity:
Country Characteristics and Experience Effects. Journal of International Business Studies 12 (1980): 922.
Doz, Y., and Prahalad, C. K.: Managing DMNCs: A Search for a New
Paradigm. Strategic Management Journal 12(special issue) (1991):
145164.
Dunning, J. H.: Explaining Changing Patterns of International Production: In Defense of the Eclectic Theory. Oxford Bulletin of
Economics and Statistics 41 (1979): 269296.
Geringer, J. M., and Hebert, L.: Control and Performance of International Joint Ventures. Journal of International Business Studies 20
(1989): 235267.
Ghoshal, S.: Global Strategy: An Organizing Framework. Strategic
Management Journal 8 (1987): 425440.
Hagedoorn, J., and Schakenraad, J.: The Effect of Strategic Technology Alliances on Company Performance. Strategic Management
Journal 15 (1994): 291309.
Hair, J. F., Anderson, R. E., Tatham, R. L., and Black, W. C.: Multivariate Data Analysis, 4th ed., Prentice Hall, Englewood Cliffs, NJ.
1995.
Hamel, G.: Competition for Competence and Interpartner Learning
within International Strategic Alliances. Strategic Management
Journal 12(Special issue) (1991): 83104.
Hannan, M. T., and Freeman, J.: The Population Ecology of Organization. American Journal of Sociology 82(1977): 929964.

J Busn Res
1999:46:1530

27

Harrigan, K. R.: Joint Ventures and Competitive Strategy. Strategic

Management Journal 9 (1988): 141158.
Hymer, S. H.: The International Operations of National Firms: A Study
of Direct Foreign Investment, MIT Press, Cambridge, MA. 1976.
Jefferson, G. H., Rawski, T. G., and Zheng, Y.: Growth, Efficiency, and
Convergence in Chinas State and Collective Industry. Economic
Development & Cultural Change 40 (1992): 239266.
Killing, J. P.: Stategies for Joint Venture Success, Praeger, New York.
1983.
Kobrin, S. J.: Managing Political Risk Assessment, University of California Press, Berkely, CA. 1982.
Kogut, B.: Joint Ventures: Theoretical and Empirical Perspectives.
Strategic Management Journal 9 (1988): 319332.
Kogut, B., and Singh, H.: Entering US by Joint Venture: Competitive
Rivalry and Industry Structure, in Cooperative Strategies in International Business, F. J. Contractor, and P. Lorange, eds., Lexington
Books, Lexington, MA. 1988, pp. 4867.
Kogut, B., and Zandor, U.: Knowledge of the Firm and the Evolutionary Theory of the Multinational Corporation. Journal of International Business Studies 24 (1994): 625646.
Luo, Y.: Business Strategy, Market Structure, and Performance of
International Joint Ventures: The Case of Joint Ventures in China.
Management International Review 35 (1995): 241264.
Luo, Y.: Partner Selection and Venturing Success. Organization Science
8 (1997): 648662.
Luo, Y., and Chen, M.: Business Strategy, Investment Strategy, and
Performance of International Joint Ventures: The Case of China,
in Cooperative Strategies: Asian Pacific Perspective, Beamish, P. W.,
and Killing, J. P., eds., The New Lexington Press, San Francisco,
CA. 1997, pp. 341374.
Mahoney, J., and Pandian, J. R.: The Resource-Based View Within
the Conversation of Strategic Management. Strategic Management
Journal 13 (1992): 363380.
McGee, J. S.: Industrial Organization, Englewood Cliffs, NJ, PrenticeHall. 1988.
Mitchell, W., Shaver, J. W., and Yeung, B.: Performance Following
Changes of International Presence in Domestic and Transition
Industries. Journal of International Business Studies 24 (1983): 647
669.
Morck, R., and Yeung, B.: Why Investors Value Multinationality.
Journal of Business 64 (1991): 165187.
National Council for USChina Trade: Special Report on US Investment
in China, Washington, DC, U.S. Department of Commerce. 1991.
Nee, V.: Organizational Dynamics of Market Transition: Hybrid
Forms, Property Rights, and Mixed Economy in China. Administrative Science Quarterly 37 (1992): 127.
Neter, J., Wasserman, W., and Kutner, M.: Applied Linear Regression
Models, Chicago, Irwin. 1989.
Parkhe, A.: Strategic Alliance Structuring: A Game Theoretic and
Transaction Cost Examination of Interfirm Cooperation. Academy
of Management Journal 36 (1993a): 794829.
Parkhe, A.: Partner Nationality and the StructurePerformance Relationship in Strategic Alliances. Organization Science 4 (1993b):
301324.
Parkhe, A.: Messy Research, Methodological Predispositions, and
Theory Development in International Joint Ventures. Academy of
Management Review 18 (1993c): 227268.
Parkhe, A.: Interfirm Diversity, Organizational Learning, and Longev-

28

J Busn Res
1999:46:1530

ity in Global Strategic Alliances. Journal of International Business

Studies 22 (1991): 579601.
Phillips, A.: A Critique of Empirical Studies of Relations Between
Market Structure and Profitability. Journal of Industrial Economics,
24 (1976): 241249.
Porter, M. E.: Competitive Advantage, Free Press. New York. 1980.
Porter, M. E.: Competition in Global Industries, Harvard Business
School Press, Boston, MA. 1986.
Prahalad, C. K., and Hamel, G.: The Core Competence of the Corporation. Harvard Business Review 90 (1990): 79-91.
Rawski, T. G.: Chinese Industrial Reform: Accomplishments, Prospects, and Implications. American Economic Review 84 (1994):
271275.
Roman, Z.: Competition and Industrial Organization in the Centrally
Planned Economies, in New Developments in the Analysis of Market
Structure, J. Stiglitz, and G. F. Mathewson, eds., MacMillan, London. 1986.
Rumelt, R. P.: How Much Does Industry Matter? Strategic Management
Journal 12 (1991): 167185.

Y. Luo

SAS: SAS/STAT Users Guide, Version 6, 4th ed., Cary, NC, SAS
Institute. 1990.
Scherer, F. M., and Ross, D.: Industrial Market Structure and Economic
Performance, 3rd ed., Houghton Mifflin, Boston, MA. 1990.
Shan, W.: Environmental Risks and Joint Venture Sharing Arrangements. Journal of International Studies 22 (1991): 555578.
Teece, D. J.: Multinational Enterprises, Internal Governance, and
Industrial Organization. American Economic Review, Papers and
Proceedings 75 (1985): 233238.
Teece, D. J., Pisano, G. and Shuen, A.: Dynamic Capabilities and
Strategic Management. Working paper, University of California,
Berkeley, 1991.
Wernerfelt, B.: A Resource-Based View of the Firm. Strategic Management Journal 5 (1984): 171180.
Yan, A., and Gray, B.: Bargaining Power, Management Control, and
Performance in United StatesChina Joint Ventures: A Comparative Case Study. Academy of Management Journal 37 (1994): 1478
1517.

Coal mining & dressing

Petroleum/natural gas extraction
Ferrous metals mining
& dressing
Nonferrous metals mining
& dressing
Building materials &
other nonmetal
minerals mining & dressing
Salt mining
Other minerals & dressing
Logging & transport of timber
& bamboo
Purification & supply of tap water
Food processing
Grain processing
Beverage processing
Tobacco processing
Forage industry
Textile industry
Cotton textiles
Woolen textiles
Silk Textiles
Sewing industry
Leather, furs & related products
Timber processing, bamboo,
cane, palm fiber, &
straw products
Furniture manufacturing
Paper making & paper products
Printing
Culture, educational, & sports
goods
Arts & crafts articles
Power generation, stream &
hot water production
& supply
Petroleum processing
Coking, gas & coal related
products

Industry Sector

21.70
9.11
26.10

5.07
4.23
21.25
45.86
1.58
6.44
212.41
26.01
21.18
7.24
21.31
0.04
21.63
20.40
20.62
1.30
5.28
5.26
26.20
3.97
6.21
5.41
0.28
267.61
34.57
22.69

7.48

20.67
3.35
6.26

27.59
7.13
23.43
24.07
23.39
2.67
3.37
2.22
6.34
4.66
21.76
22.70
1.31

20.63
26.68
3.66
2.25

3.39
1.64

22.10
8.11

4.22

19.40
22.74

8.17
9.60
16.29
19.58

5.07
35.42
23.71
21.48
30.37
22.81
43.52
16.03
15.48
12.30
28.00
25.93
22.51

22.51
16.25
32.63

21.87

22.08

21.23

4.49

20.35
9.75

8891

1.76
30.89

9093

0.05

37.25
38.63

36.58
17.96

58.31
30.48
17.45
35.70

17.56
56.46
35.18
26.01
33.98
12.35
29.49
24.51
6.20
20.78
11.59
47.74
49.80

59.80
16.89
100.00

28.44

42.63

34.65
40.56

9093

(2)
GR(%) of Net
Output

0.78
6.47

8891

(1)
GR(%) of # of
Enterprises

23.86

20.94
44.70

30.99
19.83

25.10
17.37
16.49
20.96

19.80
44.49
13.50
12.24
21.79
8.86
26.42
13.59
12.14
18.94
10.12
27.28
30.20

14.66
14.89
13.33

12.33

30.81

12.39
26.46

8891

23.31

32.13
43.50

32.88
23.50

41.78
26.42
24.07
26.54

21.21
36.50
11.49
15.89
16.93
14.75
29.31
16.99
9.67
17.69
11.89
33.43
44.29

44.22
11.13
130.62

24.89

36.57

24.25
48.04

9093

(3)
GR(%) of
Sales Revenue

28.42

18.17
24.55

21.79
22.08

17.58
12.93
16.39
13.05

7.74
22.35
17.21
18.54
18.97
34.77
32.30
19.38
22.10
15.21
16.96
24.17
22.06

11.92
20.49
25.99

14.99

13.39

16.26
27.03

27.65

28.62
24.89

30.89
22.39

24.12
17.26
22.71
26.43

5.50
18.93
7.73
17.14
22.23
30.53
24.45
17.88
14.78
11.29
21.46
35.70
32.15

40.20
18.63
73.05

17.91

9.28

10.21
23.14

8891 9093

(4)
GR(%) of Net
Fixed Assets

Appendix 1. Descriptive Statistics of Chinese Industry Structure Attributes (GR: growth rate)

252.02

2106.07

23.34
57.16

26.60
14.19

22.27
212.10
17.08
213.43

158.18
106.55
28.47
8.77

71.25
64.53
24.45
3.60
114.83
23177.1
38.96
2546.19
216.73
511.12
218.37
32.26
128.17

256.35
235.17
233.22
0.82

72.28
26.10
213.45
1.04
211.42
2499.9
4.90
220.73
2140.8
229.57
214.60
23.42
233.17

29.80
25.98
25.99

20.03

22.24
2.31
22.66
26.00

31.07

29.90
223.24

9093

8.13

62.17
217.34

8891

(5)
GR(%) of After
Tax Profit

225.29

15.69
3.75

1.84
1.44

231.54
214.09
211.98
4.92

218.87
25.19
22.75
1.96
8.51
11.79
14.98
20.51
216.91
218.22
4.05
4.79
29.12

7.98
3.29
44.22

1.19

11.09

167.97
217.53

8891

2148.79

19.85
20.67

22.76
13.88

84.64
41.25
9.35
13.72

28.56
58.59
20.95
6.66
32.08
10.52
24.85
28.64
214.71
32.84
25.84
25.81
50.41

35.23
20.96
51.83

4.50

33.65

63.40
126.71

9093

(6)
GR(%) of Pre
Tax Profit

0.88

15.24
12.80

12.52
9.27

26.28
22.67
1.27
10.26

13.07
26.78
5.80
8.53
10.81
269.83
20.92
5.00
216.95
0.55
7.13
12.68
5.63

9.78
9.27
24.74

9.27

15.00

46.65
5.81

30.05

8.05
18.08

12.18
13.12

28.69
18.25
18.51
8.07

29.13
11.53
13.16
9.48
14.55
192.61
14.55
13.55
56.73
18.11
13.55
13.41
21.99

7.73
8.36
12.36

8.18

8.90

57.52
18.14

234.42

12.26
36.57

25.85
15.37

62.05
35.96
11.51
19.56

24.28
40.24
6.10
10.55
36.48
2516.91
24.29
282.57
20.40
98.89
3.35
29.37
51.68

35.58
6.41
71.23

13.46

29.07

27.36
41.03

Continued

67.82

36.16
12.04

10.15
7.67

194.43
32.78
11.40
10.69

22.90
21.60
15.17
10.40
36.90
1189.70
12.40
207.65
11.89
184.63
13.17
14.16
37.52

16.83
9.56
35.18

10.86

10.94

19.65
44.62

Comprehensive Growth Index

8891
9093
Mean (%)
SD
Mean (%)
SD

StructurePerformance Relationship
J Busn Res
1999:46:1530

29

0.88
20.44
19.86
12.76
20.48
1.49
0.29
20.18
12.22
5.81
20.82
10.83
22.49
12.35

22.23
0.49

7.45

8.38
22.12
0.07
2.14
3.74
3.09
1.76
20.03

6.75
4.19

20.19
5.64
16.28

10.67
24.78
3.46
4.56

7.46
12.29
2.10
3.22

2.48
4.31

6.83
0.93
5.78
2.83

9093

7.09
7.40
8.51
7.96

8891

(1)
GR(%) of # of
Enterprises

20.63
8.20

16.00

27.46
23.26

20.46
16.74
13.28
12.65
21.32
7.15
21.10
24.37

10.58

16.76
22.44

31.38
33.10
21.31
23.84

21.78
23.95
16.13
37.13

36.44
17.14

44.72

34.22
14.51

39.00
41.41
29.42
23.56
10.52
55.01
36.22
33.17

59.90

48.37
47.95

34.59
23.88
17.89
33.86

20.02
5.46
10.36
16.61

8891 9093

(2)
GR(%) of Net
Output

23.73
9.19

29.50

36.28
30.87

22.16
21.94
28.52
25.15
31.20
49.91
22.80
27.80

27.35

24.60
28.35

28.88
19.46
20.29
30.39

12.18
12.91
6.17
15.18

32.80
19.69

52.64

37.05
18.46

29.71
34.82
8.84
29.49
26.46
57.73
37.17
27.14

44.78

39.83
35.41

28.73
16.82
21.32
27.96

19.62
15.51
12.68
13.60

8891 9093

(3)
GR(%) of
Sales Revenue

Source: The authors calculation based on China Statistical Yearbook (1988 through 1994 editions).

Mean (%)
SD

Chemicals & allied products

Basic raw chemical materials
Organic chemical products
Daily use chemical products
Medical & pharmaceutical
products
Chemical fibers
Rubber products
Plastic products
Building materials & other
nonmetal mineral products
Cement manufacturing
Smelting & pressing ferrous
metals
Smelting & pressing nonferrous
metals
Metal products
Machine building industry
Industry equipment
Daily use machinery
Transportation equipment
electric equipment & machinery
Daily use electric equipment
Electronic & telecommunication
equip.
Daily use electronics apparatus
Instruments, metals, & other
measuring/equipment

Industry Sector

Appendix 1. Continued

18.81
6.15

10.42

23.80
23.83

14.87
15.39
9.16
8.37
10.97
12.91
17.23
20.14

14.61

13.25
15.37

27.59
14.36
14.76
20.37

20.89
27.28
24.78
23.76

8891

24.16
11.87

30.54

29.70
21.96

24.31
25.93
27.62
11.28
13.19
28.99
27.23
26.08

23.97

21.01
13.97

31.97
30.99
20.09
24.90

20.24
20.24
7.37
15.62

9093

(4)
GR(%) of Net
Fixed Assets

34.17
262.55
515.60

39.26
17.45

217.55
234.54
213.92

10.18
32.62
26.66
26.25
458.67
58.79
39.14
100.86

216.38
215.38
225.41
223.61
241.23
1.50
222.49
6.36

219.85
81.58

66.05

214.12

29.14
5.58
14.02
13.72

24.65
6.45
28.73
218.94
121.24
246.56

219.83
223.15
3.26
26.40

215.45
221.99
214.77
22.56

219.80
216.71

9093

8891

(5)
GR(%) of After
Tax Profit

4.51
29.67

25.40

29.15
219.98

23.43
23.51
211.99
210.97
33.40
6.90
27.11
7.05

2.20

21.72
1.91

2.61
14.08
2.60
27.08

20.10
23.91
24.16
9.46

8891

26.02
38.15

36.40

34.24
8.95

17.97
29.66
13.56
23.68
31.62
57.14
31.17
35.38

51.12

61.39
78.76

27.25
7.20
15.94
18.46

0.25
21.00
0.56
3.75

9093

(6)
GR(%) of Pre
Tax Profit

8.38
15.38

6.07

11.27
4.61

7.68
5.51
2.27
2.29
6.13
13.58
5.55
14.28

8.01

5.14
8.64

15.55
16.62
8.72
8.63

7.73
7.61
6.11
15.16

14.36

19.63
24.30

13.17
13.55
17.47
15.88
24.83
16.64
16.52
10.32

12.57

14.74
15.16

14.23
11.33
10.91
17.70

12.91
16.79
12.89
12.62

10.42
89.05

35.14

30.92
13.14

22.32
27.93
12.06
19.09
91.71
44.98
29.46
36.97

44.28

48.79
70.37

27.06
18.21
15.59
20.58

7.42
3.00
6.67
7.67

12.52

9.45
8.05

9.95
13.71
13.08
10.12
164.42
17.94
11.30
30.94

17.19

37.76
82.70

7.71
9.32
5.89
9.64

14.18
13.93
4.08
8.32

Comprehensive Growth Index

8891
9093
Mean (%)
SD
Mean (%)
SD

30
J Busn Res
1999:46:1530
Y. Luo