Government relationships

China is converting from a state/centrally planned economy to a market economy; however, the government retains great influence in the Chinese market. Land and other important resources are under government control. Firms that have better relationships with various governmental institutions are expected to have greater problem-solving capacity (Luo, 1999). Forming strategic alliance with local partners who have strong government relationships is an efficient means for MNCs to overcome barriers in the local market.

Government relationships also provide firms with legitimacy for its products, especially in industries where the prevalence or dominance of a technical standard determines the subsequent competitive performance of firms. As the Chinese government often plays a key role in determining the adoption of a specific technological standard in many industries, it is very important for MNCs to ally with the appropriate firms that have key influence on standards issues in the local market so as to ensure the successful development and commercialization of technology.

Taking a recent example (Einhorn, 2004), the Chinese government implemented a new policy requiring all wireless network equipment to comply with a new, Chinese-made encryption standard, but it will not give any foreign companies access to the standard due to national-security concerns. Thus, companies like Intel that want to sell Wi-Fi products in China have to become partners with two dozen or so Chinese concerns designated by the government, despite much debate over this policy among many MNCs.

Human resources China's human resources are a key factor attracting MNCs to undertake R&D activities in China (Li and Zhong, 2003). China has a large pool of well-trained scientists, engineers and technicians who are capable of performing quality basic and applied research and who do so at a relatively low cost. According to Walsh (2003), there were 2. 4 million people engaged in scientific and technological activities in 1999, including 1. 4 million scientists and engineers.

MNCs have been taking advantage of the vast high quality/low cost human resource pool to carry out R&D activities for their global strategy. Vertical linkages Establishing vertical linkages is one of the traditional motives for firms to form strategic alliances. In a vertical linkage, each partner contributes one or more different element in a value chain. Strategic alliances as a vertical coordination mechanism are well explained by TCE as an intermediary form between vertical integration and spot market transactions (Sporleder, 1992). Specific assets are the principal focus of TCE.

Asset specificity is ubiquitous on both sides of R&D alliances as formed vertical linkages, due to the contribution of both sides of specialized knowledge and technology. When faced with asset specificity, firms become aware of the potential for a partner's opportunistic behavior. Open market procurement may not sufficiently guard the firm against opportunism. Vertical integration would be a better choice of governance form for recurrent transactions when distinguished by asset specificity (Williamson, 1985). However, vertical integration has significant drawbacks.

Economies of scope and scale from pooling multiple demands are lost and companies are forced into activities for which they lack competence (Bensaou and Anderson, 1999). Strategic alliances, as an intermediate form between open market and integration, contain characteristics that help avoid the problems of both markets and hierarchies. Strategic alliances can provide safeguards against the hazards of opportunism while at the same time avoiding the need for a firm to internalize an activity, which may not be aligned with its distinctive competencies or may be difficult and costly to manage (Barringer and Harrison, 2000).

Although pervious R&D alliances has focused on horizontal strategic alliances between competitors within the same industry, creating vertical linkage has been one of the key motives for MNCs to form R&D alliances with Chinese partners. In high tech sectors like the information technology industry, Chinese firms often have to purchase core components and technology from MNCs. Chinese firms often undertake system integration and develop features for the final product for the consumer market. Attracted by the market potential in China, MNCs may wish to establish long-term relationships with their Chinese customers.

R&D alliances not only provide MNCs the opportunity to establish stable relationship with their Chinese customers but also enable them to adapt their technology to meet the local market demand with the collaboration of Chinese partners who have better knowledge of the local market requirements. Transfer of complementary technology From a resource perspective, R&D strategic alliances, like other types of strategic alliances, can facilitate access to external complementary skills and resources to better exploit existing resources and develop sustained competitive advantage (Hagedoorn, et al.2000).

Technological capabilities are critical resources for carrying out R&D projects. Complex R&D projects in high tech sectors often require technological capabilities in multiple areas. Since one company may not have technical expertise in every area, firms often need to obtain complementary technology from outside. Transfer of complementary technology or exchange of patents is one of the major strategic motives for international R&D alliance formation. From a TCE perspective, R&D alliances offer an efficient way for technology transfer between partners.

Transactions of intangible assets, including the transfer of technology (for example, implicit know-how or explicit patents), are a primary cause of incomplete contracts and lead to high market transaction costs (Hagedoorn, et al. 2000). Narula (1999) suggests that alliances may be more efficient than hierarchical arrangements, particularly in volatile circumstances in which the activities undertaken are governed by uncertainty and a high degree of tacitness. R&D strategic alliances can be used as a hybrid form of organization between the market and the hierarchy to facilitate the transfer of technology.

Despite the fact that the technological gap between MNCs and Chinese firms is still large, China has achieved remarkable progress in science and technology development in recent years. Many Chinese firms have developed self-sustaining technological capabilities in some of the advanced technology areas, partly through learning from the West. Most Chinese firms have undergone a process of importing, digesting and absorbing advanced technologies from western countries to developing technology with their own property rights. MNCs may enter into R&D collaboration with Chinese partners who have the needed complementary technology or expertise.