A Study of Entrepreneurship Taiwanese Digital Content Companies in China

Candidate: Vicki Chihsuan Chiu Faculty of Creative Industries Queensland University of Technology

Principal Supervisor: Associate Professor Michael Keane

Associate Supervisor: Professor Terry Flew

Abstract

China’s accession to the World Trade Organisation (WTO) has greatly enhanced global interest in investment in the Chinese media market, where demand for digital content is growing rapidly. The East Asian region is positioned as a growth area in many forms of digital content and digital service industries. China is attempting to catch up and take its place as a production centre to offset challenges from neighbouring countries. Meanwhile, Taiwan is seeking to use China both as an export market and as a production site for its digital content.

This research investigates entry strategies of Taiwanese digital content firms into the Chinese market. By examining the strategies of a sample of Taiwan-based companies, this study also explores the evolution of their market strategies. However, the focus is on how distinctive business practices such as guanxi are important to Taiwanese business and to relations with Mainland China. This research examines how entrepreneurs manage the characteristics of digital content products and in turn how digital content entrepreneurs adapt to changing market circumstances.

This project selected five Taiwan-based digital content companies that have business operations in China: Wang Film, Artkey, CnYES, Somode and iPartment. The study involved a field trip, undertaken between November 2006 and March 2007 to Shanghai and Taiwan to conduct interviews and to gather documentation and archival reports. Six senior managers and nine experts were interviewed. Data were analysed according to Miller’s firm-level entrepreneurship theory, foreign direct investment theory, Life Cycle Model and guanxi philosophy.

Most studies of SMEs have focused on free market (capitalist) environments. In contrast, this thesis examines how Taiwanese digital content firms’ strategies apply in the Chinese market. I identified three main types of business strategy: cost-reduction, innovation and quality-enhancement; and four categories of functional strategies: product, marketing, resource acquisition and organizational restructuring.

1

In this study, I introduce the concept of ‘entrepreneurial guanxi ’, special relationships that imply mutual obligation, assurance and understanding to secure and exchange favors in entrepreneurial activities. While guanxi is a feature of many studies of business in Pan-Chinese society, it plays an important mediating role in digital content industries.

In this thesis, I integrate the ‘Life Cycle Model’ with the dynamic concept of strategy. I outline the significant differences in the evolution of strategy between two types of digital content companies: off-line firms (Wang Film and Artkey) and web-based firms (CnYES, Somode and iPartment). Off-line digital content firms tended to adopt ‘resource acquisition strategies’ in their initial stages and ‘marketing strategies’ in second and subsequent stages. In contrast, web-based digital content companies mainly adopted product and marketing strategies in the early stages, and would adopt innovative approaches towards product and marketing strategies in the whole process of their business development. Some web-based digital content companies also adopted organizational restructuring strategies in the final stage.

Finally, I propose the ‘Taxonomy Matrix of Entrepreneurial Strategies’ to emphasise the two dimensions of this matrix: innovation, and the firm’s resource acquisition for entrepreneurial strategy. This matrix is divided into four cells: Effective, Bounded, Conservative, and Impoverished.

Keywords ：Foreign Direct Investment, International Entry Strategies, Entrepreneurship,

Strategy, Digital Content Industry, Guanxi, Chinese Market

2 Table of Contents

Abstract 1 Table of Contents 3 Figures 5 Tables 7 Statement of Original Authorship 8 Acknowlegments 9 Part 1: Introduction 10 Chapter 1 10 1.1 The Justification of the Topic 10 1.2 The Research Purpose 11 1.3 The Research Questions 13 1.4 Methodology 14 1.5 Scope and Process of Research 14 1.6 Proposed Chapter Outlines 16 Chapter 2 17 2.1 Definitions of Digital Content and Characteristics of DC Industries 17 2.2 Foreign Direct Investments in China 23 2.3 Entrepreneurial Adaptation to Changing Market Circumstances and Opportunties 25 2.4 Competitive Advantage in Relation to Strategy 32 2.5 Chinese Cultural Understanding: Guanxi 39 Chapter 3 47 3.1 Methodology 47 3.2 Case Selection 49 3.3 Case Profiles 54 3.4 Interview Questions 57 Part 2: Case Study 59 Chapter 4 59 4.1 Entrepreneurship in Taiwan 59

3 4.2 Digital Content Companies and Entrepreneurship 62 4.3 Entrepreneurial Environments in China 67 4.4 Conclusion 85 Chapter 5 88 5.1 Wang Film: Labour-intensive Firm in China 88 5.2 Artkey Art Licensing Center: Art Licensing in China 104 5.3 Conclusion 119 Chapter 6 122 6.1 CnYES: Taiwanese Financial News Website in China 122 6.2 Somode: E-magazine Content Provider in China 130 6.3 iPartment: Friend-Making Website in China 137 6.4 Conclusion 153 Part 3: Synthesis 156 Chapter 7 156 7.1 Entrepreneurship in China and Taiwan 157 7.2 Taiwanese DC Firms’ Strategies in China 165 7.3 Entrepreneurial Guanxi 175 7.4 Conclusion 193 Chapter 8 195 8.1 Conclusion 195 8.2 Limitations and Recommendations 200 Appendixes 203 References & Bibliography 227

4 Figures

Figure 1.1: Data Analysis Process 15 Figure 2.1: Digital Content Value Chain 20 Figure 2.2: Content Material Value Flow Sheet 21 Figure 2.3: Environmental Variables 29 Figure 2.4: Aspects of the Entrepreneurial Process 30 Figure 2.5: Basic Steps of Strategic Planning 33 Figure 4.1: Strategy of Digital Content Industry Promotion Office 68 Figure 4.2: The Orientation of Digital Content Institute 69 Figure 5.1: Wang Film’s Animation Products 90 Figure 5.2: Animation Pictures of Legend of Nezha 96 Figure 5.3: Animation Pictures of The Adventures of Little Carp 97 Figure 5.4: The Main Characters in Wang Film Self-produced Film Fire Ball 99 Figure 5.5: Qi Baishi’s Original Artwork and Its Value-added Products 108 Figure 5.6: Cherries Created by Qi Baishi 112 Figure 5.7: The Evolution of Suzhou Wang Films’ Entrepreneurial Strategies 120 Figure 5.8: The Evolution of Artkey’ Entrepreneurial Strategies in China 121 Figure 6.1: The Teaching Process of Hair Style with Flash Motion 133 Figure 6.2: Wo Girl - The Most Popular Module of Wo Style Magazine 134 Figure 6.3: The Organization Figure of Somode 137 Figure 6.4: Some Objects in China iPartment’s Homepage 142 Figure 6.5: One of Luxury Suite in iPartment 143 Figure 6.6: One Bustling Animal Room in iPartment 144 Figure 6.7: Popular Singer Sun Yanzi’s Star Suite 148 Figure 6.8: Chinese Friend-Making Websites PV per day in February 2007 150 Figure 6.9: iPartment White-collar Users’ Visiting Frequency 151 Figure 6.10: The Evolution of CnYES’s Entrepreneurial Strategies 153 Figure 6.11: The Evolution of Somode’s Entrepreneurial Strategies 154 Figure 6.12: The Evolution of iPartment’s Entrepreneurial Strategies 155 Figure 7.1: The Taxonomy of Entrepreneurial Strategies 172

5 Figure 7.2: The Application of ‘Taxonomy of Entrepreneurial Strategies’ 175 Figure 7.3: The Relationship between Entrepreneurial Guanxi with Other Theories 179 Figure 7.4: Entrepreneurial Guanxi Taxonomy Matrix 185 Figure 7.5: Fei’s Different Order in Chinese Society 185 Figure 7.6: The Mental Process of Resources Allocation 186 Figure 7.7: The Different Order of Entrepreneurial Guanxi 187 Figure 8.1: The Application of ‘Taxonomy of Entrepreneurial Strategies’ 199 Figure 8.2: Entrepreneurial Guanxi Taxonomy Matrix 200

6 Tables

Table 1.1: Scope of Research 14 Table 3.1: Case Study Tactics for Four Design Tests 47 Table 3.2: The List of Collected Documentation 49 Table 3.3: The List of Interviewees 50 Table 3.4: The Levels of Entrepreneurship Among Five Cases 51 Table 3.5: Organizational Performance Among Five Cases 53 Table 3.6: The Background of Five Cases 53 Table 3.7: The Connection between Interview Questions and Research Questions 57 Table 4.1: The Limit of Accumulative Total Investment Amount in China 79 Table 5.1: Suzhou Wang Film Animation Productions up to 2004 93 Table 7.1: Five Cases’ Functional Strategies 169 Table 8.1: Five Cases’ Functional Strategies 197

7 Statement of Original Authorship

The work contained in this thesis has not been previously submitted to meet requirements for an award at this or any other higher education institution. To the best of my knowledge and belief, the thesis contains no material previously published or written by another person except where due reference is made.

Signature:

Date: 15 December 2008

8 Acknowledgements

This thesis would never have been possible without the support of these people. First of all, I want to thank my supervisors Michael Keane and Terry Flew who guided and encouraged me with insightful comments. I am very grateful to those examiners in every critical stage during my PhD journey: David Ahlstrom, Ringo Ma, Donald Lamberton, Greg Hearn, Yang Xiaohua, Jason Potts, Caroline Wong and Sue Carson. Furthermore, I want to thank the interviewees who gave several hours of their time for this study: George Chang, Cheng Yiwei, Jamy Lin, Bob Deyou, Alex Guo, Bonny Hu, Zhu Chun-Yang, Li Ben-Qian, Yang Chih-Hung, Edwin W.K. Lo, Claire Hsu, Huang Chung-Kuang, Eric Shan, and Jack Jiang. I also warmly acknowledge the assistance of the QUT Creative Industries Faculty and the sponsors of International Postgraduate Research Scholarship provided by Australian Department of Education, Science and Training and QUT. In addition, I am very indebted to the supervisors of my master thesis at Taiwan Ming Chuan University: Chen Yaw-Chu and Yang Chih-Hung who helped me to build the foundation of my research skills. Many thanks also to my family who raised me in a freethinking and fully support environment. I also want to thank my friends who have always been kind and understanding. Thanks for all the people who have helped me or given me the chance to make mistakes since I was born.

Because too many people should be thanked, the best way to do that is to thank God Zhi-Fan Chen

Therefore, I would like to thank God and my mother near him in the end of my acknowledgements.

9 Part 1: Introduction

Chapter 1

1.1 The Justification of the Topic

This research investigates entry strategies of Taiwanese digital content firms into the Chinese market. By examining the strategies of a sample of Taiwan-based companies, this study also explores the evolution of their market strategies. However, the focus is on how distinctive business practices such as guanxi are important to Taiwanese business and to relations with Mainland China. This research examines how entrepreneurs manage the characteristics of digital content products and in turn how digital content entrepreneurs adapt to changing market circumstances.

This is a significant research topic. First, the market-opening effect of China’s accession to the WTO has greatly enhanced global investment in the Chinese market. In addition, the Taiwanese economy has become increasingly dependent on China for production and market expansion. By 2004, there were 64,188 Taiwanese firms in China with a combined investment of US$ 39.865 billion (ROC Ministry of Economic Affairs Investment Office 2005). Taiwan ranked 4 th in foreign direct investment (FDI) in China, aheading by Hong Kong SAR, U.S. and Japan 1.

Second, the thesis is significant because it focuses on the East Asia region, collectively an important emerging ‘digital economy’. The demand for digital content products in China and Taiwan are growing rapidly. According to Pricewaterhouse Coopers’s Global Entertainment and Media Outlook (cited in Ministry of Economic Affairs Digital Content Industry Office 2007, ch2 1-17), the market scale of global entertainment and media (E&M)

1 A high proportion of Taiwan firms enter Chinese market actually via third channel areas, such as Hong Kong SAR, and Singapore. Taking this factor into account, the actual investments of Taiwanese firms were higher than these statistics revealed.

10 reached $US 1.43 trillion in 2006 and was estimated to reach $US 1.96 trillion in 2011. Asia, the third largest market for entertainment and media, accounted for $US 297 billion in 2006 and was estimated to reach $US 470.4 billion in 2011. The Asian region is positioned as one of the highest growth markets of digital content industries, especially China and India. Furthermore, the value of China’s media content industries reached $US 74.7 billion in 2006; the growth rate was 22 pecent higher than the previous year (Ministry of Economic Affairs Digital Content Industry Office 2007, ch2 130-131). In addition, Taiwan has many achievements in traditional media (for example, TV drama and music). The value of Taiwan’s digital content industries was $US 4.4 billion in 2001. By 2007 this had increased to $US 11.8 billion. The compound annual growth rate of digital content industries in Taiwan reached 21 percent during this period (Ministry of Economic Affairs Digital Content Industry Office 2007, ch1 2-3).

Third, in contrast with many past SMEs researches, this study illustrates interaction among pan-Chinese society, characteristized by a higher average savings than Western societies. In addion, Taiwan and China are culturally proximate. These cultural factors impact on how Taiwanese firms operate their business practices in China, where state enterprises continue to dominate the economy.

Fourth, entrepreneurship is highly developed in Taiwan, especially in small and medium-sized enterprises (SMEs). 97.8 percent of enterprises in Taiwan are small and medium sized, and 75.54 percent of employees work in small and medium-sized enterprises. The percent of employees working in SMEs is only exceeded by Korea and Japan (White Paper on Small and Medium Enterprises in Taiwan 2006). Zahra, Jennings and Kuratko (1999) have pointed out that eighty-five percent of entrepreneurship studies focus on manufacturing companies. Service companies, especially media firms, have received modest attention. This thesis makes a contribution to this significant gap in the SME literature.

1.2 The Research Purpose

Considering the dynamic nature of international markets and diverse political and economic

11 systems, it is not practical for firms to apply the same strategies in all markets. The necessity of selecting appropriate strategies based on complex and variable market environments makes this research topic highly valuable, though challenging at the same time.

The market-opening effect of China’s accession to the WTO has greatly enhanced global entrepreneurs’ interest in investment in the Chinese market. In China, cultural and political factors are likely to play a more important role than in other international markets. When selecting optimal strategies for entering this politics-oriented country, interested players (producers, distributors, etc.) are aware that China will not be able to meet many international benchmarks of investment environment, regulatory structure and policy implementation. In the immediate future, politics will still impact upon investment in content and online industry businesses. Investment in the Chinese market therefore involves many exogenous environmental risks (political, economic and cultural environments). It is in this cultural-political context that Taiwanese-Chinese entrepreneurship and knowledge of business processes may provide distinct advantages. Cultural proximity is a concept that has been applied in the context of consumption of media programs (Straubhaar 1991). However, the principles can apply equally to production and partnership. The cultural proximity that exists between China and Taiwan may be an enabling factor as well as a competitive advantage for Taiwanese firms.

It has also been suggested that in the international corporate race for the Chinese market, Taiwanese digital content industries need to give full play to operational capabilities, to continually strengthen core competences and maintain a competitive edge in response to various market developments (Ministry of Economic Affairs Digital Content Industry Office 2004). In view of rapid technological developments and shortened international product life cycles, the role of entrepreneurship becomes important.

This research takes into account perspectives from different sectors of Taiwan’s digital content firms. The main purpose of this study is to understand how Taiwanese digital content firms operate their international entry strategies into the Chinese market. Based on the high number of small and medium enterprises (SMEs) in Taiwan, how this is a point of

12 contrast to China, where state enterprises continue to dominate the economy. In particularly, how distinctive business practice such as guanxi is important to Taiwanese business and to relations with Mainland China. In the process, new insights will be gained about one of the most interesting markets in the world.

The Taiwanese digital content industries were chosen for four reasons:

1. Taiwan and China are culturally proximate, and this allows for the transfer of culturally compatible business practices and symbolic content (Straubhaar 1991; Hall 2003). This factor, proximity, has assisted popular culture industries such as Taiwanese TV and music. 2. It is hypothesised that cultural proximity also applies to digital content. 3. Taiwanese digital content industries are represented in all segments of the digital content chain in China.

Comparisons are made between Taiwanese companies and those from countries outside China to assess the actual contribution of cultural proximity to business profit and development in the digital content environment. This study will employ case study methodology. Five Taiwan-based digital content industry companies are selected that represent different kinds of entrepreneurship, strategy, and guanxi models.

1.3 The Research Questions

My research concerns the conduct of Taiwanese digital content firms in managing their international entry strategies into the Chinese market.

In order to examine this broader question I propose the following questions:

1. How have small and medium Taiwanese enterprises managed to compete in China where policies favour the growth of domestic enterprises?

2. What strategies have Taiwanese digital content firms adopted to compete in the

13 Chinese market?

3. How significant is the role of business practices such as guanxi to Taiwanese business success in Mainland China?

1.4 Methodology

The research design is structured in accordance with my research aims and objectives. Because this study aims to find out how Taiwanese digital content firms enter the Chinese market, and how entrepreneurship impacts upon strategy, undertaking case studies was an appropriate choice for this study. A detail description of research design and case studies is presented in chapter three.

Data collection in this study comprised documentation (reports, newspaper reports, articles, etc), archival reports and interviews.

I used the following criteria to select the following case studies Wang Film, Artkey, CnYES, Somode and iPartment: First, these companies are among the most successful in their representative industry sector. Second, they illustrate the importance of entrepreneurship in digital content industries in China. Third, they represent a range of strategies. Fourth, they represent a range of guanxi types in China. Fifth, they produce a range of digital content products in China. Sixth, they are represented in all segments of the digital content value chain in China. I will discuss the choice of case studies in more detail in chapter three.

1.5 Scope and Process of Research

According to research motives and objectives mentioned above, this study defines the scope of research as follows (see Table 1.1):

Scope Items Contents of Scope Items Research Procedures Propose research motives/objectives Explore related theories and literatures Establish research questions and research framework Conduct empirical analysis to examine research questions

14 Analyse research outcomes Propose conclusions, managerial implication and recommendations Key Research Issues Digital goods and the new economy Foreign direct investment Digital content industries’ business strategies Entrepreneurship theory Strategies Chinese media and foreign investment environment Guanxi philosophy of China Theoretic Foundation New economy theory Foreign direct investment theory Business strategies theory Entrepreneurships theory Guanxi philosophy theory Empirical Research Object Taiwan-based digital content industries Analysis Unit Company Interview Respondents High-level managers of Taiwan-based digital content corporations currently in operation or investing in Mainland China Time Phases Cross-sectional Research/Analytic Tools Case study methodology Table 1.1: Scope of Research Source: Compiled by the Researcher for this Study

Research Process

Confirm Research Motive and Objective

Explore Related Theory and Literature ; Establish Research Framework

Design Research Method and Design; Test and Modify Research Framework and Interview Questions

Arrange face-to-face interview; Collection Cases Related Papers and Documents

Analysis and Compilation of Interview and Documents Results

Propose Conclusions and Recommendations

Figure 1.1: Data Analysis Process Source: Compiled by the Researcher for this Study

15 1.6 Proposed Chapter Outlines

Part 1: Introduction and Theory Chapter 1: This chapter presents the justification of the topic, introduces the general background and purpose of this research, and outlines the key research questions. The chapter argues that China is important to Taiwan both as an export market and as a production site. Chapter 2: This chapter provides a comprehensive literature review. The chapter discusses the new economy and digital content industries, foreign direct investment in China, and the literature related to entrepreneurship and strategies. In addition, this chapter also discusses culture proximity and how guanxi is deployed in Chinese business practice. Chapter 3: This chapter provides an introduction to the research design and outlines the methodology that will be applied in the case study (chapters five and six).

Part 2: Case Study Chapter 4: This chapter describes entrepreneurship and the entrepreneurial environment for Taiwanese DC companies in China. Chapter 5: This chapter describes two offline cases of Taiwanese digital content firms in China and examines the evolution of their strategies. Chapter 6: This chapter describes the other three online cases of Taiwanese digital content firms in China, and examines the evolution of their strategy.

Part 3: Synthesis Chapter 7: This chapter discusses the entrepreneurship in China and DC companies’ international strategies in China. This chapter also focuses on the topic ‘entrepreneurial guanxi ’ and discusses the relationships between entrepreneurship, strategy and guanxi . Chapter 8: This chapter summarizes findings and limitations of the research, and recommendations for further research.

16 Chapter 2

In this chapter, I examine the definitions and classification of digital content industries in a number of countries. Following this, I examine some fundamental background to the new digital economy and foreign direct investment in China. I then discuss the literatures of entrepreneurial adaptation and competitive advantage in relation to business strategy. This chapter also examines the basis of guanxi philosophy (this will be dealt with in more detail in chapter seven).

2.1 Definitions of Digital Content and Characteristics of DC Industries

There are many existing systems of classification of digital content industries and there is much overlap. I will introduce some of the existing models before arriving at a model appropriate to the analysis in this thesis.

According to the Taiwan Ministry of Economic Affairs Digital Content Industry Office (2004, 1-2 - 1-5), digital content is defined as ‘products or services that use information technology to digitize and integrate media materials such as photographs, texts and visual / audio. Digital content industries are divided into eight categories: digital games, computer motion pictures, digital learning, digital audio/visual applications, mobile content, network services, content software and digital publications and storage.

Most Australia researches (CIRAC, AIMIA and Australian Strategic Industry Leaders Group) follow this approach. CIRAC (2003, 8) has stated ‘digital content is defined as the combination of technology and focus of production. Digital content and applications in Australia are broadly defined: they include consumer products and services such as publishing, broadcasting, firm and video services, the visual and performing arts and collecting institutions, and extend to services such as architecture, visual and industrial design, advertising and software development’.

AIMIA (Australian Interactive Media Industry Association 2005) sees ‘digital content

17 industry corresponding to the following sectors: visual effects and animation (including virtual reality and 3D products), interactive multimedia (e.g. websites, CD-ROM) and software development, computer and online games, educational multimedia (e-learning) and digital film & TV production and film & TV post-production’. Furthermore, Australian Strategic Industry Leaders Group (2005) proposed the definition of digital content industry in Digital Content Industry Action Agenda as ‘The digital content industry encompasses the production and marketing of film and television programs in the form of digital and interactive TV; online games; re-usable electronic education content; the marketing and supply of the holdings of museums, galleries and libraries in digital form; the Internet-based publishing of music, text, films and games; and the development and marketing of software, games, and online services that create digital media and visual effects, or help to manage and publish them. Mobile delivery and content is becoming increasingly important’.

In contrast, the digital content industry in Japan emphasizes six fields, namely games, software, movies, music, publications and digital content services.

The Irish digital content industry is also a helpful model. Forf’as (2002, 2-3) argued that the digital content industry includes a broad range of applications, platforms, tools, and industry sectors and contains education, information, entertainment, and consumer and business-oriented content. Within this broad area, five market sectors in Ireland have been identified as high potential growth sectors to be jointly targeted by local and overseas companies: games, digital libraries, e-learning, business and consumer telematics / wireless services and non-media applications.

This study provides the following synthesis of definitions used by different countries: Digital content industries are products or services that use information technology to digitize and integrate media materials. It includes a broad range of applications, platforms, tools, and industry sectors include digital games, computer motion pictures, digital learning, digital audio/visual applications, mobile content, network services, content software and digital publications and storage.

18 Digital Goods and the New Economy

As information shifts from analogue to digital, physical goods and services can become virtual. The metabolism of the economy, the types of institutions and relationships possible, and the nature of economic activity itself is changing.

Quah (2003, 298-303) stated that digital goods have five characteristics that make them different. They are non-rival, infinitely expansible, discrete, spatial, and recombinant. A digital good is non-rival when its use by one person will not lower the utility that another person derives from its use. A digital good is infinitely expansible when it can be produced in unlimited numbers, at high speed, and at little or no cost. Infinite expansibility generates non-rivalry. The ability to make limitless number of copies of a digital good means that everyone can have his or her own copy just like an exact original. Digital goods exhibit indivisibility as consumers or producers always use a whole copy of a digital good. The fourth feature, spatiality, means digital goods are both nowhere and everywhere at the same time. They can transmit immediately from one side to the other side of the globe. According to Tapscott (1997, 8-13), the new economy is a global economy. The fifth property, recombinant, means that new digital goods have characteristics not found in original digital goods. In the new economy, the gap between consumers and producers blurs (Tapscott 1997, 8-13).

Innovations are both process and product innovations (Ehrmann 2003). Process innovation focuses on cost reduction and new distribution pathways provided via the Internet. Product innovation focuses on the new products or services that are newly created to satisfy customers. When these different innovation methods are combined in a business model, it is sometimes difficult to distinguish between them. The relationship between products and processes is particularly important in examining the nature of business transition in China and East Asia. Ozawa (2001, 290-292) presents an different view of new economy with stage-based process of industrial structural transformation from the ‘Heckscher-Ohlin’ labour-intensive industries (typified by textiles) to the ‘non-differentiated Smithian’ scale-driven industries (steel, basic chemicals, and heavy machinery), to ‘differentiated

19 Smithian’ assembly-based industries (automobiles and electric/electronics goods) and finally to the ‘Schumpeterian’ R&D-intensive industries (specialty chips, bio-technology, and new materials) which ‘knowledge-based industries’ can be located in. Following this, he identifies a new stage, which can be identified as the ‘McLuhan’ stage (named after the media guru, Marshall McLuhan), driven-by the information technology (IT) revolution.

The McLuhan industries produce ‘abstract goods’ or ‘conceptual goods’ which may not be picked up statistically in conventional national accounting systems, and Internet-based physical goods such as PCs, mobile phones and laptops. The new McLuhan industries impact all the old economy industries in many ways including production, management, distribution, and customer services. In fact, other support industries such as finance, telecommunications, and distribution and government services usually are dramatically impacted. This concept is similar to digital content and digital creative industries.

Japan was the first Asian country to move through the previous four stages and enter the ‘McLuhan’ stage. The Asian NIEs (Hong Kong, Singapore, Taiwan and South Korea) have stepped up their efforts in R&D activities in order to catch up with Japan. China is also taking advantage of its huge domestic market that can attract foreign multinationals and technologies and is entering the assembly-based industries, especially automobiles and consumer electronics industries. In its new 5-year plan, China, however, is also making a move into knowledge-based industries. I will discuss this in more detail later.

In following section, I present a survey of literature focused on digital content industries. A digital content value chain was designed by Forf’as (2002, 4) to capture the complex nature of the industry, and this provides a clear structure for analysis (see Figure 2.1).

Figure 2.1: Digital Content Value Chain Source: Forf’as (2002, 4)

Taiwanese companies are represented in all areas of the value chain. This can be observed in the case studies I have chosen. Many segments of the value chain are service-oriented and

20 Taiwanese companies are leading in these segments. China, on the other hand, places emphasis on production and OEM segments. This is one of the significant questions of this study.

A characteristic of digital content industries is that content providers can decode content products into bits via recombining or value-added processes to create new content products (Institute for Information Industry 2003). The procedures are illustrated below:

Figure 2.2: Content Material Value Flow Sheet Source: Institute for Information Industry http://mic.iii.org.tw/itdb/, 2003

Digital content industries also are a kind of service industry. CIRAC (2003, 9) stated that service products have four characteristics that differ from physical goods. First, service products comprise largely intangible assets (intellectual property) or intangible value-added to tangible goods, as is the case of design and branding. Second, distinctions between intermediate usage and final consumption are harder to characterize than in the case of widgets or natural resources. Digital content is easy for re-use and re-purposing. Third, the economic terms of trade in services are less precise and codified than in traditional areas of the economy. Fourth, market definitions and segmentations tend to be dynamic rather than static.

21 To sum up, two dimensions describe the noticeable characteristics or issues of digital content industries. One is product itself; this relates to innovation (Tapscott 1997; Allen and Fjermestad 2001; Damanpour 2001; Hui and Chau 2002; Ehrmann 2003), recombining and value-adding (Tapscott 1997; Quah 2003; Institute for Information Industry 2003), the capacity to be infinitely expansible (Damanpour 2001; Quah 2003; Institute for Information Industry 2003), and the informational nature of products (Tapscott 1997; Allen and Fjermestad 2001). Another is the change in modes of distribution, which allows larger market coverage or globalization (Tapscott 1997; Damanpour 2001; Quah 2003), immediacy (Tapscott 1997; Quah 2003), and Internet security (Damanpour 2001; Hui and Chau 2002).

According to the above literature, ‘product’ is one of the characteristic dimensions of digital content industries. The product-based sector framework has roots in economics and industrial organization. Such a definition starts from the firm’s ability to supply specific products (used in certain ways) and from that, classifies each firm into a certain industry. This type of economic reasoning is traditionally linked to government data and statistics. Once the industrial sectors are set, categories and comparisons can be made across industries, based on characteristics of the production process.

The ‘core’ digital content products can be defined as digital games, computer motion pictures, digital learning, digital audio/visual applications, mobile content, network services, content software and digital publications and storage. There are ancillary goods and services rooted in ‘content industries’ or ‘copyright industries’, such as press and literature; music, theatrical productions, operas; motion pictures and videos; radio and television; photography; software and databases; visual and graphic arts; advertising services and copyright collective management societies (WIPO World Intellectual Property Organization 2003).

As stated above, products of digital content industries have the characteristic of being ‘value-added’, and it is easy to transfer form, and formats, into other products. I utilize the framework of the product-based sector to examine each case study and compare data between cases.

22 2.2 Foreign Direct Investments in China

Foreign direct investment is an important indicator of market openness. Following WTO accession in 2001 investment in China has progressively liberalized. The following section looks at investment in a range of industries before looking more closely at investment in digital content industries.

According to National Bureau of Statistics of China (2005), 2004 witnessed the approval of 43,664 foreign direct investment enterprises in China, an increase of 6.3 percent compared with the previous year. The actual utilized amount of FDI was US$ 60.6 billion, 13.3 percent higher than 2003. The key recipients of FDI recipients were manufacturing firms with US$ 43 billion of actual utilized value, followed by real estate companies with US$ 5.95 billion. Digital content industries accounted for just US$ 450 million in 2004. In addition, the business society of Taiwan has become increasingly dependent on China for production and market development. As mentioned in the introduction there were 64,188 Taiwanese firms in China with an investment level of US$ 39.86 billion by 2004 China (ROC Ministry of Economic Affairs Investment Office 2005). 2.

In 1978 the Chinese government instituted the economic reform (gaige kaifang) policy. The Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures was subsequently published on 1 July 1979, allowing foreign investment to enter the Chinese market. During the mid-1980, Taiwanese companies invested via ‘third channel’ areas, such as Hong Kong. Labour-intensive industries, such as foodstuff, beverage and textile industries, were the first movers. In 1987, Taiwanese government lifted its ban on investment in China, and within a few years had issued the Management Clauses of Direct Investment and Technology Cooperation in Mainland China (August 1990). Finally, the Execution Details for P.R. China’s Law to Protect Investment from Taiwan Compatriots was issued in December 1999 by the Chinese government. Recently, Taiwanese firms have

2 A high proportion of Taiwan firms enter Chinese market actually via third channel areas, such as Hong Kong SAR, and Singapore. Taking this factor into account, the actual investments of Taiwanese firms were higher than these statistics revealed.

23 invested in capital or technology-intensive industries such as electronics, telecommunication and precision machinery industries. This pattern corresponds to the model introduced on p20-21.

In order to discuss business practice in China, it is necessary to take account of organizational cultures and social attitudes towards business. A number of cultural factors are important and will be considered in this field. There is already a great deal of literature in this area in relation to business practice (Lockett 2003; Ritter 2001; Bond 1986; Guthrie 2002; Waters 1991; Perlmutter 1983).

Confucianism is the mainstream philosophy in Chinese society; it dominates people’s thinking, values and behavior. Lockett (2003) has summarized Confucian principles as: Chinese respect for age, especially following hierarchical positioning; emphasis on the group, particularly family; and the concept of ‘face’ (mianzi) in Chinese daily life.

Daoism is another important social and cultural tradition in Asian countries. Nisbett (2003 cited in Seok 2007) argued there are systematic and significant differences between the ways Asians and Westerners think, because of dissimilar philosophic principles. Nisbett (2003, cited in Seok 2007) summarizes Asian philosophy by ‘the principle of change’, ‘the principle of contradiction’, and ‘the principle of relationship or holism’. ‘The principle of change’ puts emphasize on the constantly changing nature of reality. ‘The principle of contradiction’ means oppositions and paradoxes are continuously being created, because of the constantly changing world. ‘The principle of relationship or holism’ is the philosophy that nothing exists in an isolated and independent way, like individual musical notes embedded in a melody. If we really want to understand a thing, we need to examine all its relations (Seok 2007, 223). According to Nisbett’s arguement, ‘the principle of change’ is the ultimate source to generate contradictions and relations.

Ritter (2001) pointed out another extensive phenomenon in Chinese society: mutual obligations. For retaining long-term relationships, the process must be one of balance and harmony; members within a group must not jump to conclusions quickly or blame without

24 evaluating the situation or seeking out solutions to avoid conflict. In Chinese business, contract sometimes really means little – the relationship represents everything. If a contract is needed, the Chinese definitely expect it to be flexible and allow change. Perlmutter (1983) has also pointed out another difficulty for foreign managers doing business in China. Chinese negotiating style takes a collaborative, gradual approach, and they master the waiting game. This style stresses long-term with every member benefitting rather than short-term implications; Chinese negotiators also like to discuss several issues at the same time. It usually requires foreign managers to spend a large amount of energy and time to negotiate with Chinese managers.

Western and China’s management styles exhibit quite different characteristics. Waters (1991) has outlined major different points between Western and Eastern management styles. He argues that management in Western society is hierarchical, egalitarian, segmented, and inclined to particularism. Specialized career paths are possible with rapid evaluation and promotion. The style is individual oriented. In addition, management is inclined towards decentralization of power, mobility, diversity, and a more direct approach. The focus is on systematic analysis, standardization, categorization, classification, conceptualization, precision, long-term plans, and explicit control mechanisms. In contrast, East Asian management is free-form command, and roles are loosely defined. There is holistic concern, non-specialized career paths, slow evaluation and regimented promotion. Management is socially-oriented and leaders often have high-sounding titles for low-ranking jobs. In addition, management in East Asian society reflects centralization of power, stability, unity, an indirect approach, ambiguity, reaction adaptation, informal plans, high flexibility in adjustment, and implicit control mechanisms.

2.3 Entrepreneurial Adaptation to Changing Market Circumstances and Opportunities

McKnight et. al. (2001, 14) point out that the role of the entrepreneur is important in industries such as digital content, which feature new technology, innovative products and rapid product life cycle. The theory of entrepreneurship is a particular suitable vehicle for

25 this study, because small and medium-sized enterprises (SMEs)3 are highly developed in Taiwan. In addition, China is an uncertain and complex market, which needs the spirit of entrepreneurship. In the next section, I discuss the concept of entrepreneurship and Wheelan and Hunger’s (1997) three dimensions of entrepreneurial environment. After that, I examine the entrepreneurial nature of exploiting opportunities and acquiring resources. Finally, I discuss the evolution approach of strategies ‘The Life Cycle Model’.

It is well known that no dominant theory on entrepreneurship has emerged, mainly because entrepreneurship studies cross disciplines, covering a wide range of disciplines, such as business, psychology and economics (Cassia, Fattore and Paleari 2006, 37). Kuratko and Hodgetts (2004, 29) state that the majority of definitions of, and references to entrepreneurship came from economists starting in the 1950s. For example, Schumpeter (1951, cited in Kuratko and Hodgetts 2004, 29) said ‘Entrepreneurship….consists in doing things that are not generally done in the ordinary course of business routine; it is essentially a phenomenon that comes under the wider aspect of leadership’. Cole (1959, cited in Kuratko and Hodgetts 2004, 29) said, ‘Entrepreneurship, at least in all non-authoritarian societies, constitutes a bridge between society as whole, especially the non-economic aspects of its economic endowments and to satisfy, at best they can, its economic desires’. Shapero (1975, cited in Kuratko and Hodgetts 2004, 29) stated ‘In…. entrepreneurship, there is agreement that we are talking about a kind of behaviour that includes initiative taking, the organizing or reorganizing of social economic mechanisms to turn resources and situations to practical account, and the acceptance of risk of failure’. Ronstadt (1984, 28) gave a summary that ‘Entrepreneurship is the dynamic process of creating incremental wealth. Individuals who assume the major risks in terms of equity, time, and/or career commitment or providing value for some product or service create this wealth. This product or service itself may or may not be new or unique but value must somehow be infused by the entrepreneur by securing and allocating the necessary skills and resources’.

Following this, several scholars (Kuratko and Hodgetts 2004; Hisrich, Peters and Shepherd

3 97.8 percent of enterprises in Taiwan are small and medium sized, and 75.54 percent of employees work in small and medium-sized enterprises. The percent of employees work in SMEs is only exceeded by Korea and Japan (White Paper on Small and Medium Enterprises in Taiwan 2006).

26 2005, 8) proposed a definition that I adopt in this study:

Entrepreneurship is the process of creating something new with value by devoting the necessary time and effort, assuming the accompanying financial, psychic, and social risks, and receiving the resulting rewards of monetary and personal satisfaction and independence.

Miller’s (1983) paper was a key turning point in the research on firm-level entrepreneurship, and the instruments he developed have become the standard in this area (Zahra, Jennings and Kuratko 1999, 51). He conceptualizes three related dimensions of firm-level entrepreneurship: innovation, risk taking and proactiveness. Innovation refers to a corporate environment that promotes and supports novel ideas, experimentation, and creative processes that may lead to new products, services, or processes. Schumpeter (1934; 1942) was among the first to emphasize the role of innovation in the entrepreneurial process. Schumpeter (1942) outlined an economic process of ‘creative destruction’, by which wealth was created when existing market structures were disrupted by the introduction of new goods or services that shifted resources away from existing firms and caused new firms to grow. Innovation becomes an important factor in the characterization of entrepreneurship (Lumpkin and Dess 1996). Risk taking reflects the intention to devote resources to perceived opportunities despite there being a reasonable chance of failure. Drucker (2004, 23) argued that ‘entrepreneurs indeed take risks, but so does anyone engaged in any other kind of economic activity, including the commitment of present resources and future expectations’. In this study, I treat entrepreneurs as risk takers because they involve in both risky businesses (creative industries and digital content industries) and a complex market (China). The term ‘proactiveness ’ is defined as ‘acting in anticipation of future problems, needs or changes.’ Lumpkin and Dess (1996) believe that proactiveness suggests a forward-looking perspective that is accompanied by innovation or new venturing activity. Some scholars (Caruana, Morris and Vella1998, 17; Knight 2000, 14) regarded proactiveness as ‘the opposite of reactiveness and implies taking initiative, aggressively pursuing ventures, and being at the forefront of efforts to shape the environment in ways that benefit the firm’. Other scholars (Alvarez and Barney 2002; Shane 2003) also use the terms

27 ‘alertness’ or ‘foreknowledge’ to represent the recognition of market opportunity by entrepreneurs.

Three Dimensions of Entrepreneurial Environment

Environment is also a critical factor (Miles et al. 1978; Lumpkin and Dess 1996; Wheelan and Hunger 1997; Zahra and Neubaum 1998). Entrepreneurs need to exploit opportunities and adapt to environments constantly. Several studies (Dess, Lumpkin and Covin 1997; Miller and Friesen 1984; Lumpkin and Dess 2001) have concluded that uncertain and complex environments often demand entrepreneurship in strategy making, such as SMEs entering foreign markets. On the other hand, uncertain environmental conditions can force new ventures to innovate, to take risks and become entrepreneurial. This process is strongly associated with better performance (Mill 1983; Zahra and Neubaum 1998; Lumpkin and Dess 2001).

As shown in Figure 2.3, the general environment can be divided as internal (organizational) environment, task (industrial) environment and societal environment in entrepreneurship research (Lumpkin and Dess 1996; Wheelan and Hunger 1997). Zahra and Neubaum (1998) focus on four environmental dimensions, namely macro environmental hostility, market hostility, competitive hostility and technological hostility. Macro environmental hostility and technological hostility are also related to societal environments. Market and competitive hostility are associated with industrial environments. International entrepreneurial decisions are more complex, especially with uncontrollable factors such as economics, politics, culture and technology.

28

Societal Environment

Figure 2.3: Environmental Variables Source: Wheelan and Hunger (1997), cited in Kuratko and Hodgetts’s (2004)

Dynamic Process of Exploiting Opportunities and Acquiring Resources

Ronstadt (1998, cited in Morris and Sexton 1996, 6) believes entrepreneurship is a dynamic process with multiple risks. Hisrich, Peters and Shepherd (2005, 38) argue that the entrepreneurial process, which involves more than a typical management process, puts emphasis on ‘identifying and evaluating the opportunity’ and ‘ identifying resources’ as in Figure2.4. The stage of ‘identifying and evaluating opportunity’ includes opportunities assessment, creation and length of opportunity, real and perceived value of opportunity, risk and returns of opportunity, opportunity versus personal skills and goals, and competitive environment. ‘Identifying resources’ includes determining resources needed, determining existing resources, identifying resource gaps and available suppliers, and developing access to needed resources.

29

Figure 2.4: Aspects of the Entrepreneurial Process Source: Hisrich, Peters and Shepherd 2005, 38

Ireland et. al. (2001, cited in Alvarez and Barney 2002) point out that entrepreneurial activities are associated with creating new resources or combining existing resources in new ways. According to Resource-Based Theory (RBT) (Alvarez and Busenitz 2001), entrepreneurs have individual-specific resources to recognize new opportunities and assemble resources for the venture facilitated. Resource heterogeneity is the basic condition of both RBT and entrepreneurship theory. Many resources that lead to heterogeneity are socially complex, such as firm culture, firm reputation, and human capital (Alvarez and Busenitz 2001, 767). In the view of RBT, the heterogeneity is necessary for a sustainable advantage, but not sufficient (Alvarez and Barney 2002). In Kazanjian, Drazin and Glynn’s opinion (2002), resources could be tangible (e.g., equipment, finance) or intangible (e.g., brand name, trade secrets).

A Schumpeterian perspective (Shane 2003, 35) posits that new information is important to recognize the existence of entrepreneurial opportunities. Shane (2003, 46-50) further proposes that ‘prior life experience’, ‘social network structure’ and ‘information search’ factors can facilitate access to valuable information. Entrepreneurial alertness is the recognition of the opportunity and knowledge of market value and converting that into outputs for profit. Alertness plays a role when some actors have insight into the value of resources that other actors do not (Alvarez and Barney 2002, 93).

Evolution Approach: The Life Cycle Model

Shane (2003, 194) proposes that entrepreneurial strategy is strategic activity undertaken to discover and exploit opportunities, such as exploiting dynamic capabilities. Based on this dynamic approach, I employ the concept of life cycles to describe the evolution of Taiwanese digital content firms’ strategies in China.

30 The life cycle model analyses the object (product, firm or industry) that evolves over time, going through different stages of development, achieving different results and market performances (Cassia, L., M. Fattore and S. Paleari. 2006). Generally it is divided into four stages by scholars, including introduction, growth, maturity, and decline (Rumelt; Lippit & Schmidt; Lyden; Scott; Chaganti & Mahajan; Schmemner; Kimberly; Quinn & Cameron; Greiner, Churchill & Lewis; Tober, Adizes, cited in Wang 1987; Cassia, L., M. Fattore and S. Paleari. 2006).

Traditionally, the introduction stage is defined as the period from starting an enterprise to establishing a niche market. The growth stage is the period from entering the niche market to securing stable operating profit. The period between the growth stage and the decline stage is called the maturity stage. The decline stage happens when the sales rate decreases continually for least three years.

There are two common approaches within theories based on the life cycle model. First, life cycle phases are consequential. Products, firms, and industries change over a predictable pattern of development. Second, life cycle models are multidimensional. Most studies take into consideration concurrent determinants that cause the shift from one phase to another phase (Cassia, L., M. Fattore and S. Paleari. 2006, 15). This study also adopts the second approach.

In integrating the concept of life cycles with strategies, we can also identify the same four stages. To sum up, entrepreneurs need to engage in activities to adapt to changing market circumstances. They also need to continually seek opportunities and explore resources to exist. There are opportunities to test the validity of the life-cycle theory in the volatile Chinese market and to describe the evolution of the strategies of Taiwanese digital content firms in the Chinese market.

31 2.4 Competitive Advantage in Relation to Strategy

Strategy is a term that can be traced back to the ancient Greeks when it was used in military conflicts. Now, it is a popular term used in business. Strategies are generally divided into three kinds: overall strategies, business strategies and functional strategies. The overall strategies are usually made by head offices. They plan the overall strategies such as deciding which kind of industry to enter and what the future development of the company should be. Business strategies include medium-level decisions such as competitive strategies and are mainly made by a strategic business unit (SBU). Functional strategies are small-scale strategies of marketing, financial affairs, production, human resources, etc. and are made by low-level management teams.

Ghemawat (2002) reviewed the evolution of strategies with particular attention to three institutions: Harvard Business School, the Boston Consulting Group (BCG) and McKinsey & Company. According to Ghemawat (2002), the SWOT concept was produced from a classroom discussion in Harvard Business School, and then Kenneth Andrews put these elements together in a way that became particularly well known in the early 1960s. The 1960s and early 1970s raised a number of strategy consulting practices, such as BCG’s growth-share matrix, which was the first use of portfolio analysis and GE/McKinsey nine-block matrix. Another, more quantitative approach called profit impact of market strategies (PIMS) program was developed and applied in 620 SBUs drawn from 57 diversified corporations in mid-1970s. In 1980, Porter released his landmark book Competitive Strategy and proposed his famous value chain and five forces analysis that is used to understand the attractiveness of an industry environment for the competitors within it. The biggest conceptual advance, however, was the value net that argued the process of creating value in the marketplace involved four types of players: customers, suppliers, competitors, and complementors which Brandenburger and Nalebuff proposed in the mid-1990s (Ghemawat 2002).

Now, organizations usually utilize a plan to form strategy, generally called strategic planning. The basic steps of strategic planning are described by Figure 2.5.

32

Environmental Strategies Strategies Evaluation and Analysis Establishment Implementation Control

Figure 2.5: Basic Steps of Strategic Planning Source: Compiled by Researcher for this Study

There are some overlapping interests in the research of entrepreneurship and strategic management, such as firm adaptation to environmental change, modes of organizing and the exploitation of opportunities (Vcnkataraman and Sarasvathy 2001, cited in Alvarez and Busenitz 2001, 771). Ireland et. al. (2001) stated entrepreneurship and strategic management are both dynamic processes concerned with firm behavior and performance. The entrepreneurship and strategic management literatures (Covin and Slevin 1988; Covin and Slevin 1989; Covin, Slevin and Covin 1990; Covin and Slevin 1991; Dess, Lumpkin, and Covin 1997; Miller and Friesen 1984; Morris and Paul 1987; Ireland et al.2001) have insights for entrepreneurs and general managers about the value to be gained by paying attention to these six domains: innovation, networks, internationalization, organizational learning, top management teams and governance, and growth (Ireland et. al 2001).

Entrepreneurial actions consist of creating new resources or combining existing resources in new ways to develop new products, new markets or new customers (Ireland et. al.2001; Hitt, Ireland, Camp, and Sexton 2001, 480). On the other hand, strategic management executes the set of commitments, decisions, and actions designed to produce a competitive advantage and earn above-average returns. Wealth creation is at the heart of both entrepreneurship and strategic management (Hitt, Ireland, Camp, and Sexton 2001, 480).

Strategic management calls for firms to establish and exploit competitive advantages within a particular environmental context. Entrepreneurship promotes the search for competitive advantages through product, process, and market innovations (Ireland et al. 2001). Shane (2003, 217) says that ‘entrepreneurial strategy involves two issues: How does the entrepreneur develop a competitive advantage to preserve the profits he already earns from exploiting entrepreneurial opportunities? How does entrepreneur manage the uncertainty and

33 information asymmetry when she seeks to generate value from it?’ According to Shane (2003, 196), the entrepreneur could preserve the profits in two ways. First, the entrepreneur can preclude others from access to and understanding of strategies. Second, the entrepreneur can establish five barriers: control resources, legal obstacles, scale, reputation, and innovation. The entrepreneur also can manage uncertainty and information asymmetry in several strategies (Shane 2003, 206): growth from small scale, entry by acquisition, focus strategy, flexibility and adaptability, forming alliance, and legitimation. An appropriate set of resources is required to identify opportunities and firms need to hold or have access to heterogeneous and characteristic resources that rivals cannot easily duplicate (Hitt, Ireland, Camp and Sexton 2002, 4).

Business strategies are concerned with a firm’s industry position relative to competitors (Porter 1985). Many scholars have made different classifications of business strategies (Wissema et al. 1980; Porter 1980; Miles 1982; Galbraith and Schendel 1983; Schuler and Jackson 1987; Draman, Lockamy III and Cox III 2002)4. Some scholarly classifications are very detailed (Wissema et al. 1980; Galbraith and Schendel 1983) while others are simple (Miles 1982). In 1980, Porter proposed his landmark classifications of business strategy, namely cost leadership, differentiation and focus. After that, some scholars’ classifications are quite similar with Porter’s pattern, such as Draman, Lockamy III and Cox III’s work in 2002. Schuler and Jackson’s classification is also inspired from Porter’s model; however, their classification is more applicable to the knowledge-based economy.

For this reason, this study adopts Schuler and Jackson’s classification (1987) that used labels slightly different from Porter’s classification (1985), namely cost-reduction, innovation, and quality-enhancement. According to Schuler and Jackson (1987), involves enhancing competitiveness by lowering the prices of products or services. This method enhances production efficiency and reduces expenditures by adopting new technology, enlarging the

4 Wissema et. al. (1980) have divided strategies into six types: explosion, expansion, continuous growth, slip, consolidation, and contraction. Miles (1982) has divided strategies into two simple types, namely domain defense and domain offence. Galbraith and Schendel (1983) argue consumer product firms have six different kinds of strategies, including harvest, builder, cashout, niche or specialization, climber, and continuity while the industrial product firms have low commitment, growth, maintenance, and niche or specialization strategies. In 2002, Draman, Lockamy III and Cox III suggest firms to use the contraction, market share, product quality,

34 scale of production, or re-engineering production processes, so that a firm can sell its products or services at a lower price in the market. Innovation strategy emphasizes the development of products or services that are unique or different from those of its competitors. Finally, the success of quality-enhancement strategy is achieved by offering a standard of quality superior to that of other products or services.

A strategy is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage. In order to minimize risk, entrepreneurs adopt different kinds of business strategies, such as OEM, outsourcing to gradually building capacity and advantages.

International Strategies in China

Most literature related to the international strategies in the Chinese market are based on the key success factor (KSF) approach (Luo 1995; Luo 1997; Wong and Maher 1997; Yang 1998; Abramson and Ai 1999; Chang 1999); in this view, a splendid strategy is regarded as the best way to foster digital content firms’ competitive advantage. Success in China requires a practical business strategy and an insight into the unique Chinese market structure. After I examine this literature, I identify four key success strategies in the Chinese market: marketing, management, entry modes and guanxi .

I will discuss marketing, management and entry modes strategies in this section, and discuss the guanxi philosophy at length in the following section.

In the discipline of marketing scholars note that product (Luo 1995; Luo 1997; Wong and Maher 1997;Yang 1998;Walsh, Boylan, Huzey and Burke 1999; Wang and Ralston 2000, and Williamson and Zeng 2005), price (Luo 1995; Chan and Wright 1999;Williamson and Zeng 2005), and place (Wong and Maher 1997; Chan and Wright 1999;Williamson and Zeng 2005) are important successful factors in the Chinese market. Luo’s studies (1995; 1997) have demonstrated that the strategy variables of product quality, sales force marketing, and cost leadership business strategies.

35 and pricing have significantly positive influences on unit-level performance in foreign enterprises in China. Wong and Maher’s study (1997) also states the importance of raising the image of product quality, developing sales and distribution networks, using brand names and developing new products, and capturing regional markets.

In relation to management, Wong and Maher (1997) present seven strategies that can increase the likelihood of success in Chinese evolving market: the need for a long-term view, top-management participation, company integrity, appropriate use of Western-style management (origanization strategies) and increasing the number of well-trained middle managers and technical personnel, carefully selecting and preparing expatriates, and training young Chinese managers (human resource management strategies). Luo (1995; 1997) also demonstrates those flexible terms of payment and liberal credit granting factors have significantly positive influence on firm performance.

In respect to entry modes, digital content firms’ entry modes could be classified into export entry modes (indirect export, direct agent/distributor, and direct branch/subsidiary), contractual entry modes (licensing, franchising, technical agreement, service contracts, management contracts, construction/turnkey contracts, contracts manufacture, and co-production agreement), and investment entry modes (wholly owned; majority-owned, 51~90 percent; minority-owned, less than 50 percent; equally owned, 50-50).

Wholly owned or high control investment is the optimum entry mode in the Chinese market, because strategies and policies can be consistent with goals or visions. Firms can focus on a larger market; they can focus on traditional customers; they can utilize a higher level of technology in the firms; in addition, the development of any new product is foreign based; and the level of investment is high. However, the Chinese government has put strict regulations limiting wholly owned or high control foreign direct investment in some digital content industries, which still are regarded as a media industry.

A joint venture is perceived to be another optimal choice of entry mode in China, especially in rehional or small markets (Walsh et. al. 1999). However, finding an appropriate Chinese

36 partner is a difficult task (Chee and West 2004). Yang (1998) suggests it is necessary to shape a similar organizational culture, goals, decision-making patterns, and trust between foreign and Chinese companies.

Luo (1995; 1997) also demonstrates the significance of other investment strategy variables (e.g. industry selection, partner selection, and timing of entry), which have significantly positive influences on unit-level performance in foreign enterprises in China.

Taiwan’s Cultural Proximity

Cultural proximity is a concept that has been applied in the context of consumption of media programs (Straubhaar 1991). However, the principles can apply equally to production and partnership. The cultural proximity that exists between China and Taiwan is an enabling factor as well as a competitive advantage for Taiwanese firms. In the following section I introduce the basic ingredients of the concept of cultural proximity, to which I will return by way of extended discussion in chapter seven.

Pastina and Straubhaar (2005) confirm that television audiences’ first preference tends towards programs produced with their own language and local or national culture. A cultural-linguistic market usually is defined by historical, ethnic, religious, linguistic, geographical and other similarities (cited in Sinclair 1996, Wilkinson 1995). Audiences in the same cultural-linguistic market would share the same or similar languages as well as closely connected histories and overlapping cultural characteristics. They also share ‘colonial legacies, independence movements, struggles against foreign hegemony, development challenges and the like’ (cited in Wilkinson 1995, 57).

Many scholars have proposed different cultural models to explain the degrees of cultural proximity among cultures, for example Newman, Summer and Warren’s five-dimension (1977), Hofstede’s four-dimension (1980), and HampdenTurner and Trompenaars’s seven-dimension models (1994, cited in Singh, Xhao and Hu 2003). The four-dimension model that Hofstede proposed in 1980 has been widely studied in cross-cultural researches:

37 individualism-collectivism, uncertainty avoidance, power distance, and masculinity-femininity. In Hofstede’s study (1980, cited in Singh, Xhao and Hu 2003), he concluded that Australia, Canada, Britain, and America score high on individualism, while China, Columbia, Japan, and Mexico score high on collectivism. Greece, Japan, and Mexico received the highest scores on uncertainty avoidance, which they generally seek for security, direction and risk minimisation. On the other hand, countries like Canada, Australia, Britain, and America have been found to have greater tolerance for uncertainty. In power distance aspect, Malaysia, Mexico, China, and India are high on power distance that respects status, authority and social hierarchy. Other countries like Canada, Denmark, America, and Sweden are low on power distance dimensions that respect equal rights. Discussing about masculinity-femininity, societies like Japan, Austria, and Mexico are examples of masculine cultures that value ambition, success, and performance. On the contrary, most Nordic countries score high on femininity, which value beauty, nature and nurturance, and the ambiguity of gender roles. Following, Hall and Hall (1990, cited in Singh, Xhao and Hu 2003) propose a fifth dimension –‘high and low context cultures’. According to Hall (1976) and Hall (1990, cited in Singh, Xhao and Hu 2003), eastern cultures like China are high-context cultures, which the information is already embedded in the context of the communication, while America is low-context in orientation.

In Beamish’s study (1993, 53-54), he provides support for ‘cultural proximity’ and its impact on investment decisions. The fact that most of the JV investment in China has come from ethnically related countries (especially newly industrialized Taiwan and Hong Kong) confirms this argument. In addition, the success of Taiwanese music and variety shows in pan-Chinese societies provides the evidence on Taiwan’s cultural proximity, which benefits from similar linguistic, geographical and life styles. Luo (2007, 191) also believes pan-Chinese areas such as Taiwan, Singapore, Hong Kong and Macau nurture networks of entrepreneurial relations, not according to geography, but rather by shared traditions. One primary contributing factor is cultural proximity. As a result, investors from pan-Chinese areas more readily access and benefit from inside information, scarce resources, and controlled industries comparing with other foreign investors.

38 The socio-cultural relationships between Taiwan and China not only benefit from stricter government regulations in DCI, but Taiwanese firms have a better understanding of how to produce cultural-based products that Chinese accept. They also have the ability to build communities that assist in communicating with customers. Furthermore, Taiwanese firms have found an advantage in building partnerships and supply networks in the Chinese market.

2.5 Chinese Cultural Understanding: Guanxi

Guanxi relationships are the basis for business success in the P.R.C., even more than in Taiwan. Guanxi can be viewed as interpersonal relationship and connections (Tsang 1998; Guthrie 1998). Broadly speaking, guanxi refers to special relationships, which contain implicit mutual obligation, assurance and understandings as well as the exchange of favours (Yeung and Tung 1996; Alston 1989; Luo 1997). In the following section I introduce the basic ingredients of the concept of guanxi , to which I will return by way of extended discussion in chapter seven.

Luo (1997) points out five features of guanxi : First, guanxi is transferable. If B has guanxi with A and C, B can introduce or recommend A to C or vice versa. Second, guanxi is reciprocal. Guanxi that is no longer profitable or based on equal exchanges is easily broken. Yang (cited in Guthrie 1998) asserts that exchange, indebtedness and obligation are fundamental aspects of guanxi practice. Third, guanxi is intangible. It is established with the exchange of favours and maintained over time by unspoken commitment to others in the relationship web. Fourth, guanxi is utilitarian rather than emotional. Guanxi does not have to involve friends, though that is preferred. Alston (1989, 28) believes guanxi bonds two persons through the exchange of favours rather than through emotion. Fifth, guanxi is personal even if it is within an organisational setting: an organisation’s guanxi is established and maintained by personal contacts. Ambler (1994, cited in Alston 1989, 28) also pointed out guanxi operates on the individual level.

Ambler (1994, 76) believes that guanxi is not only at the forefront of Chinese marketing

39 thinking but is seen as a competitive advantage, which the Chinese are in no hurry to explain. Leung, Wong and Wong (1996) regard guanxi as a ‘marketing variable’ in China. Alston (1989, 29) believes that managers of foreign businesses should try to discover influential person and establish guanxi with them. Guanxi gives individuals a way to leverage their personal relations to circumvent rules. Luo (1997, 46) also supports this argument. He argues that because resources are allocated mainly by guanxi rather than other rules in China, guanxi can provide a balance of power between Chinese bureaucracy and individuals. Powerful people with the right personal connections can even influence policy and rule-making processes in their favour. In building guanxi , two frequently used tactics are gift giving and holding a banquet for the other party (Hwang 1987, cited in Xin and Pearce 1996). Time, money, and effort are required to maintain guanxi (Pearce and Robinson 2000).

Many results from empirical studies have demonstrated guanxi is positively and significantly related to firms’ performance and is one of the significant business success factors in China (Leung, Wong and Tam 1995; Abramson and Ai 1999; Carlisle and Flynn 2005; Mathew, Krishnamurti and Sevic 2005). Luo and Chen (1997) surveyed two manufacturing companies, which operated in Jiangsu Province. The findings indicate guanxi -based factors are significantly and positively related to accounting and market performance. Based on the survey of 127 firms, Peng and Luo (1998, cited in Luo 2007) argue that guanxi with other managers and government officials are significantly correlated with sales growth. Abramson and Ai (1999) also obtained similar finding from a study of 138 Canadian companies in China and identified that guanxi is critical to success.

Another important cultural dynamic is face. Mianzi (face) is an intangible form of social currency, personal status, and a key component in the dynamics of guanxi . It not only helps people to expand guanxi , but also becomes an important asset that needs to be protected in guanxi relationships (Luo 1997, 45). Luo (1997, 45) also mentioned renqing (favour), another form of social capital that can provide leverage during interpersonal exchanges.

Although some scholars see guanxi as a source of competitive advantage, Tsang (1998) argues that guanxi would be a competitive advantage only when it is considered a valuable,

40 scarce and exclusive resource. Guanxi is highly personal and guanxi between institutions can be very fluid with the mobility of staff. Guthrie (1998; 2002, 172-173) also argues the impact of guanxi may be over-stated. In his study ‘Dragon in a Three-Piece Suit: The Emergence of Capitalism in China’ , he argues the legal and institutional changes have constructed a rational-legal system to impact guanxi practices. Guthrie’s study (1998) also shows managers tend to view the importance of guanxi in market as secondary to price and quality, as this sentence saying ‘guanxi only helps if you are competitive’.

Mostly, guanxi is treated as an asset in this study. However, guanxi maneuvers in the business context might include rent seeking and bribery. It is not risk-free in China. Luo (2007) states the guanxi practices have their own benefits and costs. Bribery and nepotism are often associated with guanxi (Ylagan 2004). Bond (1986) argues that in societies like China with immature legal systems, guanxi can become tend to nepotisim and cronyism. Ambler (1994, 75) refutes the above statement by arguing that guanxi is no more equivalent to corruption; in this respect it is more like social drinking and does not equte to drunkenness. Leung, Wong and Wong (1996) also point out the different conceptualisations of bribery and corruption in China. For example, providing gifts and business trips to clients in China may be considered as ‘norms’ rather than ‘exceptions’.

The Boundaries of Guanxi

Carlisle and Flynn (2005) describe guanxi as a critical means of garnering social capital in order to maintain legitimacy in China, and a necessary foundation for survival. They argue not only private enterprises need guanxi , but also state enterprises and joint ventures firms. They also suggest that business operators should try to treat guanxi as an important cultural value and less as a cost (Carlisle and Flynn 2005).

Yang (cited in Guthrie 1998) believes guanxi practice is based on social connections sourced from the Confucian ethics of interpersonal kinship and clan system. Ylagan (2004) says that Confucian nations, such as China, Korea, Vietnam, Thailand, Singapore and Malaysia, which have sizeable populations of Chinese-descent, have applied a new concept of guanxi

41 in business and politics. Luo and Chen (1997) regard guanxi as having a similar effect on firm performance in other jurisdictions, the so-called Chinese commonwealths (Hong Kong, Taiwan, Macau, and Singapore. Ambler (1994, 75) agrees that guanxi is not unique to China. Similar thinking also impacts on business in Japan, Korea and India.

Luo (1997, 48) notes that entrepreneurs in Taiwan, Hong Kong, and Southeast Asia have been operating comfortably over time within a network of groups and family. In this respect guanxi connects ‘greater China’ in the entrepreneurial pursuit of the region’s wealth. According to Yi and Ellis (2000), in Hong Kong, an environment characterized by strong rule-of-law, a more commercial, utilitarian orientation toward guanxi is likely to be adopted.

Guanxi , Networks and Entrepreneurship

In Western society the network is a more common term than relationship ( guanxi ), especially within entrepreneurship theory. In the following section, I will discuss network theory and its relationship with entrepreneurial activities. I then discuss the difference between network and guanxi.

A network has been defined by Powell as ‘a set of descriptive characteristics and critical components. They are distinct from market or hierarchical arrangements 5 in their heavy reliance on reciprocity, collaboration, complementary interdependence, a reputation and relationship basis for communication and an informal climate oriented toward mutual gain’ (Powell 1990, cited in Larson 1992). Powell says that firms with short product cycles are likely to engage in network partnership to reposition products and respond rapidly to changing market conditions and technological developments.

Network scholars employ the concept of role-set, action-set to set up the boundaries of social networks. A role-set consists of all those people have a direct relationship with the focal person. An action-set is a group that have formed a temporary alliance for a limited

5 William (1975, cited in Boisot and Child 1996) initiated the debates of markets and hierarchies. As it evolved, the markets and hierarchies’ formulation established a unidimensional continuum, with market coordination at one end and hierarchical coordination at the other.

42 purpose (Aldrich and Zimmer 1990, 11-12). Three main theories associated with networks as well as guanxi are transaction cost analysis, resource-based analysis and social capital. In Western transaction cost analysis 6, ‘bounded rationality’, uncertainty and complexity of transaction, opportunistic behaviour on the part of some of the players, among other issues, will increase transaction costs and render market transactions inefficient. In extreme cases they lead to market failure; in its place hierarchies have to perform their functions (Williamson 1979, cited in Jarillo 1988). Therefore, relationships are formed and strengthened to minimise transaction costs (Wong and Chan 1999).

Carlisle and Flynn (2005) explain that a company tends to minimize transaction costs through internal expansion and only deals with outside suppliers when necessary. When firms grow, returns may decrease because of increased transaction costs between different divisions within the same organization. When this occurs, entrepreneurs will find it more effective to organize transactions in the market through the price mechanism or through personal connection. Relationships based on mutual trust bring long-term benefits for companies, but do not necessarily bring the best price for products and services. This runs against the business principle of ‘best value for money’.

A resource-based view of a firm examines a company’s strengths and weaknesses through analysing its resources (assets), including financial, physical, human and organizational categories. In this framework, guanxi could be viewed as a firm’s human capital as well as competitive advantage (Tsang 1998). The acquisition and accumulation of social capital is an attempt to enlist others in uncertain environments. Hanifan (1916) argued that social capital comes from good will and fellowship. Social capital is created by the fabric of social relations and can mobilize to facilitate activities among people to obtain various benefits such as earning more income (Carlisle, Flynn 2005).

Thorelli (1986, 38) suggests that ‘the entire economy may be viewed as a network of organizations with a vast hierarchy of subordinate, criss-crossing networks’. Generically, a

6 Coase’s landmark paper ‘The Nature of the Firm’ (1937) introduced transaction costs into economic analysis, and discovered the factors that determine the relative costs of coordination by management within the firm or by transactions in the market.

43 network could be viewed as consisting of ‘nodes’ or positions (occupied by firms, households, strategic business units, trade associations, and other types of organizations) and ‘links’ represent the interaction between the positions. Castells (2000, 695) argues that large, centralized apparatuses usually over perform networks in symbolic domination, standardized organization, and mass production, which actually limit networks’ competitive capacity. The development of new information technologies, especially the Internet has changed this situation.

Networks have grown to be important in entrepreneurial activities because they allow firms to quickly access information, resources, markets, and even technologies (Gulati et al. 2000; cited in Hitt, Ireland, Camp, and Sexton 2001, 480). As I mentioned before, the entrepreneurial process emphases two elements: ‘identify and evaluate the opportunity’ and ‘resources required’. The network in entrepreneurial theory can also be divided into two approaches: opportunity seeking (Venkatraman 1997; Shane 2003), and advantage or resource seeking (Porter 1980; Barney 1991).

Shane (2003, 49) notes that several studies have supported the view that networks (social ties) increase the possibility that people will discover entrepreneurial opportunities (Hitt, Ireland, Camp, and Sexton 2001). Some scholars (Aldrich and Zimmer 1990; Kaish and Gilad 1991; Shane 2003) also suggest that diverse social ties or ties to a wide variety of people encourage access to information that in turn facilitates opportunistic discovery. The notion that strong ties or ties to people that one trusts benefits opportunistic discovery has also been proposed by some researchers (Busenitz 1996; Jack and Anderson 2002; Shane 2003, 49).

However, Hitt, Ireland, Camp, and Sexton (2001, 408) believe the greatest value of networks for entrepreneurial companies is the provision of resources and capabilities needed to compete effectively in the marketplace, for instance, providing new technology, distribution, and marketing capabilities. Both direct and indirect network ties can be valuable. Indirect ties might be a third party who is connected to an investor or an entrepreneur. Initially, the third party uses his or her ties as a bond on the level of confidence in the relationship. In

44 addition, investors tend to believe in entrepreneurs who have been referred. Third, indirect ties provide private information that is difficult or slower to access. Fourth, indirect ties have characteristics that are difficult to observe, such as honesty or competence (Shane 2003, 181-184).

Peng and Luo (2000, 488) believe top managers in China cultivate two specific types of ties. The first type is a tie with executives at other firms, such as suppliers, buyers, and competitors. Satisfying relationship with suppliers may help a firm obtain quality materials, better services, and timely delivery. Ties with buyers may increase customer loyalty, sales volume, and reliable payment. To build friendly relationships with competitors may facilitate inter-firm cooperation, or provide chances to reduce transaction costs within companies. In addition, ties with government officials have to be cultivated in transition economies such as China. Pearce and Robinson (2000) argue the Chinese top-down political system means government guanxi is often essential for business success.

Some scholars equate guanxi with Western networking (Ylagan 2004). Gouldner (1973, 242-243) stated a norm of reciprocity is universal, which has two minimal demands: firstly, people should help those who have helped them; secondly, people should not injure those who have helped them. That means all societies encourge reciprocation. Guthrie’s study (1998, 281) also mentioned managers do not view the use of connections in China as any different from the way business is conducted throughout the world.

Many scholars believe guanxi is different from Western networks (Yeung and Tung 1996; Luo 1997; Lovett, Lee and Kali 1999; Yi and Ellis 2000). Yi and Ellis (2000) believe the Chinese concept of guanxi can be distinguished from networks by its focus on the utilitarian reciprocation of favours in an unequal dyad. Yeung and Tung (1996) examine the difference with guanxi and networking patterns in the Western world via two paths. Firstly, Confucianism system includes five types of relationships: ruler-subject, father-son, husband-wife, brother-brother, and friend-friend. A person should take responsibility for his given role. Secondly, in the context of Confucianism, the business contract governance by ethics is preferred than rule or law.

45 Western management literature on networks has increased. Network management is an important aspect of strategic behaviour as I discussed in the prior section. Guanxi has its own Chinese features, but also includes western qualities. Both concepts share some common features; they both emphasize that networks are continuous relationships. Favour exchanges in guanxi networks not only happen in commercial, but also in social situations, involving mianzi and renqing . Luo (1997, 47) says this feature makes guanxi similar to social capital. Western companies tend to emphasize market commitment or customer commitment. Guanxi emphasizes on personal relationship creation and development. You first develop a fine guanxi with key managers in another organization, and then you can build a good network with that organization.

Following these foundations, I will apply guanxi , a necessary but not sufficient part in Chinese business society, as part of the entrepreneurial system and return to it in the discussion.

46 Chapter 3

This chapter introduces the methodology that will be applied in the case study (chapters five and six). I examine the rationale of cases through Covin and Slevin’s (1989) ‘Firm-level Entrepreneurship Scale’, which measures the levels of entrepreneurship, and Bracker and Pearson’s ‘Strategic Planning Levels’ (1986, cited in Kuratko and Hodgetts 2004) that examines the strategic levels in firms. I then reveal the results of a questionnaire from my field trip from November 2006 to March 2007. Finally, I profile the case studies chosen (Wang Film, Artkey, CnYES, iPartment, and Somode) and further define the differences among these case studies.

3.1 Methodology

Yin (2003, 1) states ‘In general, case studies are the preferred strategy when ‘how’ or ‘why’ questions are being posed, when the investigator has little control over events, and when the focus is on a contemporary phenomenon within some real-life context’. Punch (2005, 145) presents four characteristics of case studies, namely ‘bounded system’, ‘a case of something’, ‘holistic’ and ‘multiple methods’. This implies that a case study has boundaries; it should make the logic and strategy of the research clear, it should attempt to understand the unity of the case, and include multiple sources and data collection methods such as interviews, documentary analysis and observations. Interviews can provide an insight into respondents’ memories and draw out explanations of events as well as current problems and objectives.

The common argument against using case studies is generalizability – that is, we can generalize from the results (Punch 2005; Stark and Torrance 2005). Yin (2003, cited in COSMOS Corporation, 34) presents four tests that I have summarized in Table 3.1.

47 Table 3.1: Case Study Tactics for Four Design Tests Source: Yin (2003, cited in COSMOS Corporation)

The research design is structured in accordance with my research aims and objectives. Because this study aims to find out how Taiwanese digital content firms enter the Chinese market, and how entrepreneurship impacts upon strategy, undertaking case studies is an appropriate choice for this study. To counter the problem of generalizability, I have drawn on multiple sources of evidence. Key informants were able to review drafts in order to establish ‘construct validity’ (Yin 2003). I also used causal models to establish internal validity (as mentioned above). Showing how replication of results occurs across multiple-case studies answers the question of ‘external’ validity. In addition, developing case study databases has assisted the reliability of findings.

According to Yin (2003, 85-96) multiple data sources improve the construct validity, thus data collection in this study comprised three parts:

1. Documentation: including formal studies or evaluations, public reports, administrative documents, agendas, announcements, written reports of events, newspaper clippings and other articles appearing in mass media relating to entrepreneurship and strategy in the Chinese market. 2. Archival Reports: Archival reports were used together with other sources of information in each case.

48 3. Interviews : I interviewed the chief and senior executives where possible to acquire insight into entrepreneurship, in particular strategies and operational performances utilized in China. In addition, I also interviewed some scholars or practical experts of DCI to get more neutral opinions to compare with the ‘insider view’.

3.2 Case Selection

As discussed in chapter one, I used six criteria to select case subjects: first, these companies are among the most successful in their respective industry sector. Second, they illustrate the importance of entrepreneurship in digital content industries in China. Third, they illustrate a range of entrepreneurial strategies. Fourth, they represented a range of guanxi types in China. Fifth, they produce a range of digital content products in China. Sixth, they are represented in all segments of the digital content value chain in China.

I selected five cases: Wang Film, Artkey, CnYES, iPartment, and Somode. I followed my research design to collect data in three ways: documentation, archival reports and interviews. Before the interviews, I collected the documentation and archival reports from two main academic electronic archives, namely China National Knowledge Infrastructure (CNKI) and R.O.C. National Central Library from November 2006 to March 2007. These documentations (e.g. theses, journal articles, magazines and newspaper clippings) relate to each case’s background, history, milestones and business activites in China. I also acquired internal documents from interviewees and company official websites (see Table 3.2). N= article Sources China National R.O.C. Published materials Internal documentation / Sum Knowledge National archival reports / official Infrastructure Central websites Cases Library Wang Film Theses: 3 Theses: 6 Journal articles: 35 Internal documentation: 11 114 Journal articles: 10 Archival reports: 0 Newspaper: 13 Official websites: 36 Artkey Theses: 1 Theses: 3 Journal articles: 27 Internal documentation: 3 179 Journal articles: 23 Archival reports: 82 Newspaper: 8 Official websites: 32 CnYES Theses: 0 Theses: 3 Journal articles: 31 Internal documentation: 0 97 Journal articles: 8 Archival reports: 0 Newspaper: 7 Official websites: 48 iPartment Theses: 0 Theses: 2 Journal articles: 19 Internal documentation: 1 194 Journal articles: 7 Archival reports: 135

49 Newspaper: 13 Official websites: 17 Somode Theses: 1 Theses: 1 Journal articles: 7 Internal documentation: 0 85 Journal articles: 27 Archival reports: 4 Newspaper: 9 Official websites: 36 Table 3.2: The list of collected documentation Source: The researcher compiled for this study (2007)

I then conducted my field trip from January to March 2007, which involved spending approximately one month in Shanghai, and the remainder of the time in Taiwan. I interviewed the Chief Executive Officer (C.E.O.) and senior executives to acquire insight into entrepreneurship, and in particular strategies utilized in China. In addition, I also interviewed some scholars and experts of digital content industries to get alternative opinions to compare with the ‘insider view’ (see Table 3.3).

Companies / Institutes Core industry of DCI Name These Position of Interview Time of Interview Interviewed Subjects Wang Film / Cuckoos Nest Computer Animation George Chang President (Suzhou) 12 Jan., 2007 10:00 ~11:00 / 16:00~ 17:30 Suzhou Artkey Art Licensing E-Publishing and Alex Guo CEO 16 Jan., 2007 Center Digital Archiving 16:40 ~18:00 Shanghai CnYES.com, Inc / Chinan Network Service Bob Deyou President & CEO 3 Mar., 2007 Yes.com 16:00 ~ 17:30 Taipei CnYES.com, Inc / Chinan Network Service Bonny Hu President (Shanghai) 5 Jan., 2007 Yes.com 16:00 ~ 18:30 Shanghai CnYES.com, Inc / Chinan Network Service Eric Shan Planner & Art Editor 5 Jan., 2007 Yes.com 16:00 ~ 18:30 Shanghai iPartment / Sunfun Info Network Service Jamy Lin One the Founders 14 Feb., 2007 Co., Ltd. &Vice-CEO 15:00 ~ 18:00 Taipei Somode E-Publishing and Cheng Yiwei President 23 Feb., 2007 Digital Archiving 14:00~16:30 Taipei Digital Content Industry - Huang Chung-Kuang Manager 20 Mar., 2007 Program Office of 10:00~12:00 Economic Affairs Taipei Institute For Information - Claire Hsu Section Manager 16 Mar., 2007 Industry 11:00~12:20 Taipei School of Journalism, - Zhu Chun-Yang PhD. & Lecturer 24 Jan., 2007 Fudan University 16:10~17:30 Shanghai School of Media and - Li Ben-Qian PhD. & Professor 25 Jan., 2007 Design, Shanghai Jiao 15:30~19:30 Tong University Shanghai School of - Yang Chih-Hung PhD. & Dean 3, Mar., 2007 Communications, Ming 18:00~19:30 Chuan University Taipei

50 Department of Advertising, - Edwin W.K. Lo Chairman 20 Mar., 2007 Chinese Culture University 13:30~14:30 Taipei

Shanghai Yappy Cultural Computer Animation Jack Jiang Director 29 June, 2007 & Media Productions Co. 17:00~18:00 Ltd Interview Table 3.3: The list of Interviewees Source: The researcher compiled for this study (2007)

As I discussed in Chapter 2, the spirit of entrepreneurship is one of the important elements of a SMEs, especially in digital content industries. In order to further ensure the five cases illustrate the importance of entrepreneurship a simple questionnaire was conducted (see Appendix 2).

I utilized Covin and Slevin’s scale, a widely adopted instrument in the field, to assess if an entrepreneurial strategic posture is particularly beneficial to small firms in hostile environments. The nine-item scale, which Covin and Slevin initially employed in a survey of small manufacturers in 1989, was modified from Miller and Friesen (1982) and Khandwalla (1976). This instrument focuses on innovation, proactiveness, and risk-taking. Miller used this approach to measure entrepreneurial-conservation orientation (Covin and Slevin’s 1989, 77-78). The lowest score of entrepreneurial orientation among these five firms is 4.7 in a Likert 7 scale questionnaire. The detailed data is provided below in Table 3.4.

Companies Core industry of Name of Title of Score DCI Interviews Interviews Wang Film / Cuckoos Computer George Chang President 5.33 Nest Animation (Suzhou) iPartment / Sunfun Info Network Service Jamy Lin Vice-CEO 4.89 Co., Ltd. CnYES.com, Inc / Chinan Network Service Bob Deyou President & CEO 4.89 Yes.com CnYES.com, Inc / Chinan Network Service Bonny Hu President 5.33 4.70 Yes.com (Shanghai) CnYES.com, Inc / Chinan Network Service Eric Shan Planner & Art 3.89 Yes.com Editor Artkey Art Licensing E-Publishing and Alex Guo CEO 5.22 Center Digital Archiving Somode E-Publishing and Yiwei Cheng President 5.22 Digital Archiving Table 3.4: The Levels of Entrepreneurship among Five Cases Source: The researcher compiled for this study (2007)

Bracker and Pearson’s ‘Strategic Planning Levels’ (1986, cited in Kuratko and Hodgetts

51 2004) was utilized to ascertain levels of strategy within these firms. ‘Strategic Planning

Levels’ divide firms into four levels: Structured Strategic Plans (SSP), Structured Operational Plans (SOP), Intuitive Plans (IP), and Unstructured Plans (UP). Structured Strategic Plans (SSP) represent strategic plans that are formalized, for example, written long-range plans covering the process of determining the major organization decisions. SSP also involves environmental analysis, the expectations of dominant inside interests, determination of strengths and weakness of the firm and feedback, and information about past, current, and future performance. The plan period of SSP is typically 3~15 years in nature. Structured Operational Plans (SOP) representing strategies are written short-range operational budgets and plans of action for current fiscal periods. The typical plans of SOP include basic output controls, such as production quotas, cost constraints, and personnel requirements. Intuitive Plans (IP) represent these formal plans as developed and implemented based on the intuition and experience of the firm’s owner. IP are developed depending on objectives of the owner and the firm’s present environment. Unstructured Plans (UP) mean no measurable structured planning.

As a result, Wang Film and Artkey strategy falls into the category of Structured Strategic Plans (SSP). CnYES, and Somode belong to Structured Operational Plans (SOP). Only iPartment is located in the category Intuitive Plans (IP). In short, Wang Film and Artkey mostly employ high-level strategic plans while CnYES and Somode mostly use second-level strategic plans. iPartment employs the lowest-level strategic plans among these five companies. Because no company regards itself as belonging to the category of Unstructured Plans (UP) that verifies that all cases have implemented strategic plans.

To ensure these cases were among the most successful in their respective industry sectors, a research questionnaire was adopted. This questionnaire contains Vorhies et. al.’s (1999) idea, which separates organizational performance in digital content industries into four dimensions (growth, profitability, customer satisfaction, and adaptability) to examine performance, as Appendix 27. The lowest score of organizational performance among these

7 Dess and Robinson (1984, 271) found out the subjective performance measured within those top management teams have strongly correlated with objective measures of return on assets and growth in sales. Subjective measures maybe useful in attempting to operate broader, non-economic dimensions of

52 five firms is 5.11 in a Likert 7 scale questionnaire. The scores of all case studies lean to the upper level (The median score is 4). This means the entrepreneurs satisfy the organizational performances of those companies, compared with other competitors in past two years. These five cases are eligible. The detailed data expressed as below Table 3.5.

Companies / Core industry of Name of Title of Score Institutes DCI Interviews Interviews Wang Film / Cuckoos Computer George Chang President 5.6 Nest Animation (Suzhou) iPartment / Sunfun Network Service Jamy Lin Vice-CEO 5.11 Info Co., Ltd. CnYES.com, Inc / Network Service Bob Deyou President & CEO 4.9 Chinan Yes.com CnYES.com, Inc / Network Service Bonny Hu President 6.1 5.37 Chinan Yes.com (Shanghai) CnYES.com, Inc / Network Service Eric Shan Planner & Art 5.1 Chinan Yes.com Editor Artkey Art Licensing E-Publishing and Alex Guo CEO 6.2 Center Digital Archiving Somode E-Publishing and Yiwei Cheng President 5.2 Digital Archiving Table 3.5: Organizational Performance Among Five Cases Source: The researcher compiled for this study (2007)

Table 3.6 shows the background of these cases. The employee numbers in four of these cases are much greater than in Taiwan. Most of these case studies have operated in the Chinese market for over seven years, and all are small in size.

Companies / Core industry of Numbers of Total Numbers of Numbers of Year of Net Profit Institutes DCI Employee Employee in Employee in Enter (China/Whole China Taiwan China company %) Market Wang Film / Computer Approximate 1000 200~400 Approximate300 1996 > 40% Cuckoos Nest Animation Artkey Art E-Publishing 50 40 10 2000 - Licensing Center and Digital Archiving CnYES.com, Inc / Network 65 12 53 2000 15% Chinan Yes.com Service iPartment / Sunfun Network 60 40 20 2005 - Info Co., Ltd. Service Somode E-Publishing 70 70 0 2000 100% and Digital Archiving Table 3.6: The Background of Five Cases Source: The researcher compiled for this study (2007)

organizational performance. Therefore, I also adopted the subjective method to measure the organizational

53 3.3 Case Profiles

In this section, I will brief introduce the company profiles of each case (Wang Film, Artkey, CnYES, Somode, and iPartment), and state why I chose them for this study.

Wang Film (Hong Guang)

Wang Film is a famous animation firm and its selection in this project illustrates cost-reduction strategy in China. I chose Wang Film as a case study because it has a long experience in outsourcing as well as substantial international experience. Wang Film was found in 1978 by James Wang. Its studio, Cuckoos NEST Studios, has become one of the largest and most productive studios of high-quality animation worldwide. The studio has produced over 3,300 TV episodes, 62 feature-length films (including films and DVDs), and specials for clients around the globe.

In its early years, Wang Film Productions had opportunities to produce animation for eight major film studios in Europe and Hollywood. Based on such experiences, other major international media companies, including Walt Disney TV Animation, Metro Goldwyn Mayer, Universal Studios, Rankin Bass Productions, BLT, Bakshi Animation, Film Roman, DIC (France), Nelvana (Canada), CINAR (Canada), and BRB (Spain) established long-term partnerships with Wang Film. From the beginning of the 1990s, Wang Film established cartoon enterprises in Suzhou to process original cartoon content both for local and overseas markets. Wang Film and another Taiwan-owned enterprise, Hongyang, cooperated with China Central Television (CCTV) in making a cartoon called Legend of Nuozha and achieved national success with this. Advertising income exceeded US$12 million and the sales of cartoon books totalled US$ 7.4 million.

Artkey Art Licensing Center

Artkey is an Asian art licensing enterprise that introduces Asia artworks to Western markets. performance of the digital content industry.

54 I chose Artkey as a case study because it is the first company of its kind in the Asian market. It uses new technology to digitalize a database of artworks and develop franchise products based on these artworks.

In July 2003, Artkey became the largest Asian art licensing enterprise to provide cell phone screen images. Its platforms include several of the largest communications corporations in the Greater China region, such as Chunghwa Telecom, Sohu and SmarTone. Artkey’s digital licensing model applies art images mainly to technological products, such as the Internet, cellular phones, PDAs and notebook computers. The art images can work as screen pictures, electronic greeting cards, wallpaper, screen savers and flash animation. Liu Guosong, Ghen Haizann and Wu Yeizhao are some of Artkey’s featured artists.

CnYES

CnYES, a leading online financial brand in Taiwan, provides a variety of financial investment information and services. CnYES is chosen for this study because CnYES (and Tai-son.Com) target an audience of Taiwanese firms to attract high-price advertisers, and to provide unique services in China.

At present, CnYES provides information on stock markets from Taiwan, Hong Kong, New York, and Shanghai-Shenzhen. CnYES also provides the professional research reports from Forex.Com, Polaris MF Global Futures, and Yuanta Futures. Most first-rate financial information is provided in English and is expensive. Bob Deyou, the president and CEO of CnYES decided to set up CnYES to provide popular Chinese financial knowledge in the Greater Chinese market. In May 2000, CnYES established the parent company in the Cayman Islands, and set up the subsidiaries in Taipei, Shanghai, and Hong Kong. In January 2005, Shanghai CnYES sets up Tai-son.Com to provide services to Taiwanese firms in China, and those firms intending to invest in China. Tai-son.Com adopts different strategies to CnYES and Shanghi CnYES. Eighty percent content of Tai-son.Com is daily life information, while 20 percent is financial information.

55 Somode

Somode is a content provider that owns two of the most popular fashion e-magazines in China. I chose Somode because it released the first Pan-Chinese interactive digital magazine Cool Music Journal , and created a new format for e-magazines.

Somode’s predecessor is Fashionow, which was established in Taiwan in 1997. By means of R&D, Fashionow has spearheaded the market with its first innovative product ‘Kuro’ to become a popular music search and download application in Taiwan and Mainland China. In order to improve Kuro’s membership service, Fashionow released the first Pan-Chinese interactive digital magazine Cool Music Journal in July 2002. In May 2006, Fashionow built a new brand with its e-magazine department, named Somode, while it changed domain name to www.somode.com. Following that, two new e-magazines were launched, with Go! New Power released on 15 May 2006, and LaVie, Self-Entertainment released on June 1, 2006.

At present, Me Beauty and Wo Style , two-weekly magazines, are two of most popular e-magazines in China. According to iresearch (2007), the volume of circulation of Me Beauty and Wo Style both exceeded 3 million each release. In August 2007, Somode was named one of Red Herring 100 Asia Company. It was not only the sole e-magazine media on this list, but also the first time a Chinese e-magazine content provider won this honor (DoNews 2007). In order to reinforce the influence of e-magazine on advertisers, Somode and Chinese e-magazine firms Muzine signed a contract for further partnerships in advertisement, content, and distribution in July 2007. According the contract, Somode would be the chief advertising agency and distributor of Muzine in the Chinese market. Meanwhile, Muzine would provide more content to support Somode (DoNews 2007). iPartment iPartment is the biggest Web2.0 Avatar －Social Network Service (SNS) website in China. I choose iPartment because of following reasons: iPartment integrates two new Internet concepts: Avatars and Web2.0. Furthermore, iPartment has scored a high profit and a large

56 amount of subscribers in China.

Four high-school friends established iPartment, a holding company in the Cayman Islands, with branches in Taipei in August 2003. Following that, iPartment set up another branch in Shanghai in July 2005. iPartment established an advanced friend-making website for the white-collar market in China. Members to this site can acquire a free single suite. They can also decorate their suite in their own style via purchasing different types of Avatars, such as wallpaper, lamps, a bookshelf, a sofa, a computer, a TV, a bathing pool, a microwave, a hammock, even a mahjong table, and a swimming pool. They can change their apartments, clothes, hairstyles and pets on demand. Users can even buy clothes, furniture, and a bundle of ready-made or DIY flowers as a gift for others; they can create a gift list in their suite, too.

China iPartment started in the advertising business in 2006 and has many famous clients, including eBay, Sony, Lancome and Alpenliebe. Furthermore, China iPartment has set up an independent advertising and sales department. At present, the chief sources of revenue of China iPartment are advertising, VIP membership and Avatar, each accounting for 1/3 of the total income (NetEase 2006; Tom.com 2007). China iPartment has won several honors in China. For example, 2007 Chinese Top 10 Innovation Business Model Award, 2007 Annual Best 100 Investment Websites and The Most Potential Company: Internet Friend-Making Category. In January 2006, iPartment introduced the first round investment with US$ 1 million dollars from iDT Venture (Sohu.com 2006).

3.4 Interview Questions

Nine key interview questions framed this study based on the research questions, although I conducted unstructured interviews where appropriate:

Interview Questions Connected Research Questions 1. Can you discuss your firm’s background in digital General Questions content industry? 2. What is your main purpose in entering the Chinese 1. How have small and medium Taiwanese enterprises

57 market—e.g. for market development or for cheap managed to compete in China where policies favour labour? What are your entry modes, short, middle and the growth of domestic enterprises? long-term goals? In what ways are you innovative and 2. What strategies have Taiwanese digital content entrepreneurial in your field? Would you discuss how firms adopted to compete in the Chinese market? important firm-level entrepreneurship is (innovation, risk taking and pro-activeness) in the Chinese market environment? Is it a greater or lesser advantage in China than in Taiwan? How do entrepreneurs learn to negotiate change in policy? How do you build an entrepreneurial environment? 3. Could you discuss how the characteristics of digi tal 2. What strategies have Taiwanese digital content content industries (for example, use by one person will firms adopted to compete in the Chinese market? not lower the utility that another person derives; digital products can be reproduced in limitless quantity and quality at little or no extra cost, Quah 2003) impact your entrepreneurial strategies? And the support service industries’ operation such as network service, advertising services and copyright collective management societies? 4. How important is guanxi in entering the Chinese 3. How significant is the role of business practices market? How has your company developed guanxi with such as guanxi to Taiwanese business success in personal, industries and governments? Mainland China? 5. Can you discuss other strategic factors such as 2. What strategies have Taiwanese digital content management strategies (organization, process, human firms adopted to compete in the Chinese market? resource, finance, and CRM), marketing strategies (product, price, place, promotion)? What are your advantages about these strategies’ factors? 6. What unforeseen difficulties have you experienced in 2. What strategies have Taiwanese digital content entering the Chinese market? How have these been firms adopted to compete in the Chinese market? dealt with? How have you changed your business strategies during this situation? 7. How do you deal with strong competition from 3. How significant is the role of business practices Korea, Japan or other countries? Do you think cultural such as guanxi to Taiwanese business success in proximity is a key advantage when Taiwanese firms Mainland China? enter the Chinese market? What other advantages do you think Taiwanese firms have in the Chinese market? Would you discuss the conditions of possibility for the development of exportable digital content? Would you compare China with other foreign markets in environment, entrepreneurships, strategy’s benefits and difficulties? 8. Do you think Chinese firms have caught up with 1. How have small and medium Taiwanese enterprises Taiwanese firms -- and in what areas? What are the managed to compete in China where policies favour advantages or disadvantages of cooperation with the growth of domestic enterprises? Chinese firms? 9. Who are your competitors? General Questions Table 3.7: The Connection between Interview Questions and Research Questions Source: Compiled by Researcher for this Study

58 Part 2: Case Study

Chapter 4

In the previous chapters, I have presented key research questions (chapter one), provided a comprehensive literature review (chapter two) and discussed the methodology and case profiles (chapter three). The following three chapters represent Part II of the thesis are case studies. In chapter four I document fieldwork and preliminary observations associated with respondents’ comments on the entrepreneurship in Taiwan. In chapter five I examine two examples of companies that are off-line—in the sense that their products are produced in more traditional formats; for instance animation and artworks. In chapter six, I will look at companies whose operations are predominantly web-based. In addition, I will examine these firms’ strategies in Mainland China: namely, cost-reduction, innovation and quality-enhancement. In the final chapter I will return to the research questions again.

4.1 Entrepreneurship in Taiwan

Taiwan has a history of entrepreneurship long before the term ‘entrepreneurship’ came into fashion. Between 1624 and 1662 Taiwan was administered by Holland. The Dutch established a trading base for commerce with Japan and coastal China. At that time, Taiwan, which was known as Formosa, had built the foundation of export trade. During the Qing Dynasty (1644- 1911), the Mainland Chinese authorities established a policy called ‘Three regulations of immigrant Taiwan’8 which sought to limit immigration to Taiwan. These regulations also barred families from traveling to Taiwan. A popular saying described the dangerous trip from the Mainland to Taiwan ‘six people die, three people stay, and one comes back’ (Yang 2007).

People from the Chinese province of Fujian were poor, however, and illegal immigration

8 Three regulations of immigrant Taiwan include: 1. Businessmen from Mainland to Taiwan should get the pass permission from Fujian and Taiwanese local governments. 2. Businessmen cannot come to Taiwan with their families, and Taiwanese residence cannot bring their relatives from China to Taiwan. 3. There are a lot thieves in Canton, thus Cantonese are banned from coming into Taiwan.

59 continued. Many of the men married locally, resulting in another idiom ‘There is Mainland grandfather, but no Mainland grandmother’.

In this chapter, I discuss why Taiwanese have strong aspirations to start an enterprise. I compare digital content companies’ entrepreneurship between Taiwan and China. Next, I examine Taiwanese digital content firms’ entrepreneurial environment in China adopting Wheelan and Hunger’s classification (1997): societal environment , task environment , and internal environment . As I discussed in chapter two, the societal environment is related to ‘macro environmental hostility’, and ‘technological hostility’. The task environment is the industrial environment, and is associated with ‘market hostility’, and ‘competitive hostility’. The internal environment is related to the organizational environment. The societal environment, task (industrial) environment and internal (organizational) environment are therefore a general classification in entrepreneurship environment research (Lumpkin and Dess 1996; Wheelan and Hunger 1997).

Entrepreneurship and Culture

Taiwan was effectively a region of commercial trade outside the Qing trade law. After the Chinese Civil War in 1949, some wealthy families followed the Kuomintang (KMT) government to Taiwan. Due to historical and cultural factors, entrepreneurship is currently very important in Taiwan. 97.8 percent of enterprises are small and medium sized, and 75.54 percent of employees work in small and medium-sized enterprises. The percentage of employees in SMEs is only exceeded by Korea and Japan (White Paper on Small and Medium Enterprises in Taiwan 2006).

In analysing the characteristics of entrepreneurship in Taiwan, Yang Chih-Hung, the Dean of School of Communications at Ming Chuan University (2007 Interview: 3 Mar) believes there are too many people and too little land in Taiwan; the result is there a sense of insecurity. In his view this helps to explain why Taiwanese entrepreneurs are able to bear hardships, work diligently, and have a spirit of enterprise. He believes many Taiwanese are unwilling to become salaried workers, and would rather be self-operating businessmen. In

60 fact, Taiwanese firms have not only set up enterprises in China; they have expanded their horizons to Southeast Asia, Latin America, and the U.S.A.

Edwin W.K. Lo, the chairman of Department of Advertising, Chinese Culture University (2007 Interview: 20 Mar) points out that the national character heavily influences entrepreneurship in Taiwan. He also suggests that the influence of Confucianism means that Taiwanese are less adventurous and perhaps more cautious in decision making than those in China and Singapore.

This view was supported by Cheng Yiwei, president of Somode (2007 Interview: 23 Feb.) who mentioned the impact of environment, history, and culture. In his opinion, Singaporeans are content to work for others whereas Taiwanese are good at doing business, building and managing factories, and a view supported by the large number of Taiwanese factories now situated on the Mainland. According to Cheng, the Taiwanese are very resilient.

The results from these interviews are consistent with the theories on Confucian entrepreneurship. However, Yeung (2004, 21-26) has proposed counter arguments against the cultural impacts on pan-Chinese entrepreneurship. Hsing (2003, cited in Yeung 25) discussed a doubt on culturalist view of entrepreneurship:

The characteristics of the Chinese Confucianism, loyalty and hierarchy, in Max Weber’s work, for example, are seen as the reason for the lack of capitalism in China at the beginning of the twentieth century. But the same characteristics are seen as the reason for the economic miracle in 1970s in East Asia. Thus the same conduct and characteristics in these two cases led to opposite consequences. To put it plainly, good or bad, capitalism or no capitalism, it is because they are Chinese and they are Confucianists. It does not really avoid the trap of essentialism, while at the same time assigning a causal relationship to coexisting phenomena (Hsing 2003, 232).

In Yeung’s opinion (2004, 26), the focus is not on whether Chinese entrepreneurship is

61 distinctively Chinese, and in what ways it evolves in a global era towards a kind of hybrid capitalism.

Other interviewees mentioned a variety of features of entrepreneurship in Taiwan: the ability to bear hardships, diligence, entrepreneurial spirit, conservatism and creativity. Alex Guo, the CEO of Artkey (2007 Interview: 16 Jan) thinks the capacity of Taiwanese to bear hardships and work hard has diminished. Bob Deyou says that Taiwanese entrepreneurship is about ‘throwing a sprat to catch a whale’, in other words, using limited resources to achieve big targets. This reflects the tendency to favour SMEs.

George Chang, Suzhou president of Wang Film (2007 Interview: 12 Jan) proposed the values of flexibility, and high quality of human capital. Bob Deyou, the president and CEO of CnYES (2007 Interview: 3 Mar) uses the phrase ‘Even if they are poor, they are still willing to push the car to the outside to carve out the niche for themselves’. By this, he believes that Taiwanese have an indomitable spirit. Lo (2007) pointed out that few enterprises in Taiwan struggle alone. Most involve couples, friends, and partners. From this perspective, the entrepreneurship of Taiwan is conservative and less adventurous. People want to share risk.

4.2 Digital Content Companies and Entrepreneurship

After the discussion of entrepreneurship in Taiwan, the follwing sections start the disputation between entrepreneurship and digital content industries in Taiwan.

Claire Hsu, a section manager of the Institute for Information Industry (2007 Interview: 16 Mar) reflected on special entrepreneurship in Taiwanese digital content firms. She believes Taiwanese digital content firms are not driven purely by profit. She maintained that digital content entrepreneurs in Taiwan have set up enterprises because of their own interests or ideals, for example they have a partiality for beautiful things or they love to play games. In her opinion digital content firms in Taiwan in general have not earned significant profits compared with other industries.

62 Huang Chung-Kuang, a manager of the Digital Content Industry Program Office of Economic Affairs (2007 Interview: 20 Mar) also agrees that Taiwanese digital content companies are not driven purely by profit. There are some spontaneous creative markets in Taiwan. Even though there are a variety of government assistance programs, Huang feels the government does not provide enough assistance. Capital investors also seldom invest in such markets because they consider the economies of scale are small in Taiwan. This view is also supported by Cheng (2007), who argues that self-reliance exists in Taiwanese digital content firms because of the lack of effective support from the Taiwanese government.

Yang Chih-Hung (2007) believes Taiwanese digital content firm entrepreneurs take minimal risks but they often invest in unpredictable industries. For example, Taiwanese firms were evident in China during the economic reforms of the 1980s, a period of unpredictability and uncertainty.

As I discuss later, Taiwanese digital content firms find it difficult to obtain loans from banks and have difficulties in seeking out investors. Taiwanese digital content entrepreneurs tend to source their investment by themselves. This kind of situation also contributes to the conservative nature of Taiwanese digital content firms (Hsu 2007).

Another reason to explain the inherent conservatism of Taiwanese entrepreneurship is the influence of Confucian traditions. Taiwanese entrepreneurs embrace the Confucian doctrine of the ‘golden mean’: this is the felicitous middle between the two extremes, that of excess and deficiency. In other words, people prefer to take middle-of-the-road approach.

The contrast between entrepreneurial spirit and inherent conservatism in Taiwanese DC firms seems a contradictory proposition, but it is not. In Peter Drucker’s book Innovation and Entrepreneurship (2004, 26), he argues entrepreneurship is ‘risky’, mainly because so few entrepreneurs know what they are doing. Drucker employs the cases of Bell Labs and IBM to prove high-tech entrepreneurship need not be ‘high risk’, but that it does need to be systematic and well managed. In this regard, Taiwanese inherent conservatism also leads entrepreneurs to plan carefully and process step by step to avoid high risks.

63 Comparison between Taiwanese and Chinese Digital Content Companies

This section will state the comparison between entrepreneurship of digital content industries in Taiwan and China. Most interviewees believed entrepreneurship of DCI in Taiwan was stronger than entrepreneurship in China (Zhu 2007 Interview: 24 Jan; Li 2007: Interview 25 Jan; Yang 2007). Interviewees also believe features of Chinese entrepreneurship include heroism and opportunism (Zhu 2007 Interview: 24 Jan; Huang 2007; Lo 2007).

Zhu Chun-Yang, a Lecturer of School of Journalism, Fudan University (2007 Interview: 24 Jan) remarked that China prefers to use the term ‘cultural industry’. He contends that Chinese DC industries lead in technological innovation, but are weak in marketing innovations. Some products have excellent technologies, but lack enough benefits to attract consumers. Chinese DC companies would tolerate high risks in technological innovation; however, imitation is still the mainstream in the Chinese market.

According to Zhu Chun-Yang (2007), there are some specific problems within Chinese digital content industries: The first is obstruction from the government. The local governments want to have their own DC companies, but they are not willing to invest heavily. In addition, they do not allow other DC firms to invest, too. Taking digital TV as an example, local governments want to make high profit from the set top boxes, not just from paid programs, thus the lack of emphasis on content makes digital TV difficult to popularize.

A second problem is fostering the market. For instance, even where the digital TV content is diverse, there are few interactive programs on offer. It is therefore difficult to attract consumers to realize the difference between digital and analogue TV. Li Ben-Qian, a professor of School of Media and Design at Shanghai Jiaotong University (2007: Interview 25 Jan) agreed with Zhu, although the Chinese Communist Party (CCP) Central Committee wants to foster digital content industries, there are still many problems. For example some technical standards are experimental; some entrepreneurs are very active; the central government is not positive enough; and supplementary services are insufficient. It is

64 interesting that Chinese respondents claim the government is doing too little. As we shall see later, Taiwanese interviewees believe the Chinese government is doing quite a lot.

Li Ben-Qian thinks entrepreneurship in China is not strong. He says there is a lack of innovation, and also a gap of technology, capital and experience with United States, Japan and other developed countries. Comparing the entrepreneurship in Taiwan and China, he says that the former exhibits stronger innovative consciousness, has wider institutionalized space, and that Taiwanese media is more market-oriented. However, it has limits of region, resources, and markets. China is still at an initial stage of development at present and innovation and entrepreneurship is relatively undeveloped.

Zhu Chun-Yang from Fudan University in China (2007) also thinks entrepreneurship in Taiwan is superior to Chinese, because Taiwan is relatively marketized and internationalized. He points to the fact that some media heroes have emerged in Taiwan along with a more mature DC market system, and that a greater autonomy in entrepreneurship. However, he still thinks DC market is still limited in Taiwan. According to Zhu, the concept of entrepreneurship in China is a little like the Chinese saying ‘the first barrel money’. There are two main ways to obtain this ‘the first barrel money’9 in China: market speculation and conspiring with administration and power. Because of a lack of professionalization in digital content industries at present, ‘market speculation’ has taken precedence. Furthermore, because the Chinese administrative system is based on a power structure that can absolutely dominate resource distribution, and achieve the purpose of wealth accumulation, ‘conspiring with administration and power’ becomes the best way to gain the first barrel money. This has lower political risk. In other words, security comes from being connected.

Zhu Chun-Yang also mentioned a three-step strategy in China: the first step is innovation: for example, identifying a new product or niche market. Innovation is the foundation of starting an enterprise. The second step is obtaining the venture capital. The third step is going public on the NASDAQ stock market to concentrate capital. However, he believes

9 ‘The first barrel money’ means the first big amount of money in someone’s life, it is critical to let people make high-risk investments or set up an enterprise to accumulate wealth quickly. ‘The first barrel money’ often means one million TWD in Taiwan.

65 entrepreneurship in China is not transparent, because of the shortage of capital in the non-government domain. This fact also consolidates closeness to government; that is, the special relationships ( guanxi ) with government administrations.

Yang Chih-Hung from Ming Chuan University in Taiwan (2007) also agrees that DC entrepreneurship in Taiwan is superior. He maintains that the evidence resides in the digital content industries’ value chain. The upstream of the digital content industry is creativity, middle is innovation, and while downstream is entrepreneurship. In terms of creativity, he argues that Taiwan is still relatively creative at present from TV variety shows to new goods and services from IT industries. Innovation is also an essential condition of the digital content industry; innovation is reliant on funds, talent, channel and product. He believes that the environment of Taiwanese digital content industries is not dynamic enough, because the financial structure is inadequate and investment capital is insufficient. Despite this, Taiwanese firms have invested time and resources in achieving innovation. According to Yang, entrepreneurship in digital content industries does exist and is quite strong, but the capital investment environment is not as good as Japan, Hong Kong and Korea. Comparing Taiwan and Chinese DC, there is a great quantity of human resources and funds, a huge domestic market and an excellent geographical location in China. Because there is significant capital available from Chinese government, there is a tendency to form bigger enterprises and larger production lines. However, there is less innovation.

Because information is not very transparent, risk-taking is sometimes higher. In Huang Chung-Kuang’s (2007) observation, Chinese entrepreneurs are relatively inclined to act first and then consider the consequences of the action. Taiwan is more transparent and subject to legal process, but this has the effect of inhibiting the adventurous actions of enterprise. Yang also argues that China looks towards economies of scale. Taiwan establishes strong firms first then grows the firms; in doing this they also focus on niche markets. Chinese DC firms are inclined to initiate an overall plan to make firms larger scale first, and then seek to make them strong. The strategies are very different.

Comparing Chinese and Taiwanese DC industries, Cheng Yiwei (2007) believed Taiwanese

66 DC industries have some advantages in China. Music and entertainment industries are very creative. He contends that Chinese creativity is still weak at present, and this certainly relates to democracy. For example, Taiwan became a full democracy in 1987.This brings with it greater confidence to express ideas.

Edwin W.K. Lo (2007) also finds most of Taiwanese firms’ entrepreneurial strategies focus on I-r (high innovation and low risk-taking) and i-r (low innovation and low risk-taking) strategies. There are many continuous innovations, but they seldom result in large changes. On the other hand, most Chinese firms try to leapfrog innovation. According to Lo (2007), there is a more heroic and adventurous spirit in China.

4.3 Entrepreneurial Environment in China

In the following section I discuss Taiwanese DC companies’ entrepreneurial environment in China through three analytical categories: societal environment, task environment, and internal environment, which Wheelan and Hunger proposed in 1997. I will examine the Taiwanese and Chinese governments’ DC policies, examine difficulties of raising capital, and the tiny Taiwanese domestic market (societal environment). Following this, I will examine Taiwanese DC firms’ competitive advantages and Taiwanese DC firms’ competitors in China (task environment). Finally, I will examine the Taiwanese DC firm’s enterprise culture and the proposed and decision process of entrepreneurial strategies (internal environment).

Societal Environment

As I discussed in chapter two, societal environment involves four forces: socio-cultural forces, economic forces, political/ legal forces, and technological forces (Wheelan and Hunger 1997).

There are a range of government organizations and programs impacting on the Taiwanese digital content industries. This will be discussed separately. The most influential official

67 organization in the Taiwanese digital content industry, Digital Content Industry Promotion Office (DCIPO), was established by Ministry of Economic Affairs (MOEA) in 2002. Its function is to act as the single window for the industry’s services and promotions. The Digital Content Industry Promotion Office (DCIPO) was operated by the Institute for 10 Information Industry (III) for four years. The Legislative Yuan, the supreme legislative organization in Taiwan, legislated for the separation of DCI management and operational organization in 2006. At present, The Corporate Synergy Development Center (CSD)11 manages the Digital Content Industry Promotion Office (DCIPO).

Figure 4.1: Strategy of Digital Content Industry Promotion Office Source: Digital Content Industry Promotion Office (2007, http://www.nmipo.org.tw/Eng/FocusWork.php)

Another high-level organization, The Digital Content Institute (DCI), was established in Nankang Software Park in December 2003. It is operated by Institute for Information Industry (III), and supervised by Digital Content Industry Promotion Office (DCIPO). Its funding comes from the Industry Development Bureau (IDB), and the Ministry of Economic

10Institute for Information Industry (III) was established in 1979 as a non-profit organization, jointly sponsored by the Taiwan government and dozens of prominent private enterprises, for the purpose of growing and strengthening Taiwanese information industry development. 11Corporate Synergy Development Centre (CSD) assists enterprises to establish C-S System that benefit all participants in image-building, management, product quality, industry upgrading and international

68 Affairs (MOEA). The aims of the Digital Content Institute (DCI) are to provide qualified talent, host international seminars and workshops, and build international strategic partnerships for Taiwanese digital content industries (see Figure 4.2). Until now, the Digital Content Institute has had significant achievements in each section12. The Digital Content Institute (DCI) also established two regional resource centers in Taichung and Kaohsiung that provide co-facility services to help small and medium size business to produce.

Figure 4.2: The Orientation of Digital Content Institute Source: Digital Content Institute (2007, http://www.dci.org.tw/english/about_02.htm)

The most noteworthy plan in Taiwanese digital content industries’ history, the Two-Trillion and Twin-Star Industries Plan, was promoted by the Industrial Development Bureau Ministry of Economic Affairs in May 200213. The ‘two-trillion industries’ refer to the

competitiveness. 12The Digital Content Institute (DCI) has operated a long-term massive training program over 4200 person-hours, and on-job training program nearly 9000 person-hours and these students have won some international prizes, such as the first prize and third prize in “USA DMS’ 2006 Conference Competition in Multimedia Arts” and The Best Short Film Award in “The 3rd China International Animation and Digital Arts Festival” (Digital Content Institute2007, Achievement and International Awards). Digital Content Institute (DCI) has held many international seminars and workshops, and invited over 50 international speakers from USC, CalArts, SEGA, Namco, Production IG, Disney, Blue Sky, DreamWorks, Pixar, Microsoft, Adobe, and Tokyo University, etc. Digital Content Institute also has some international strategic partnerships such as with Microsoft, Sony Computer Entertainment Inc. (SCE), Namco, and Adobe. E3 Expo, Licensing 2005 International (New York), Tokyo Game Show, Annecy Animation Festival etc. 13 Two-Trillion and Twin-Star Industries Plan was submitted in accordance with the Challenge 2008 - National

69 semiconductor and flat panel display industries. The plan aims to help these two industries reach the future production value exceeding NT$1 trillion (US$ 30.7 billion). The ‘twin-star industries’ refer to the digital content and biotechnology industries, which are believed to be emerging stars of the future. The Industrial Development Bureau also announced the Establish Digital Content Institute Plan at the same time.

In addition, three key projects contribute to developing the Taiwanese DCI environment: First, The Strategy of Developing Network Multimedia Industry in the NII Promotion Program (1999-2001) was intended to create innovative software and service industry through promoting the Digital Content and Network Service industries. Second, the National Science and Technology Program for e-Learning was established on 15 January 2002, and is sponsored by the National Science Council (NSC). It planned to spend US $120 million within a 5-year period on this inter-department program. The National Science and Technology Program for e-Learning aims to build a high quality e-Learning environment and lead Taiwan into a knowledge-based economy. The participating agencies include the Ministry of Education, the Council of Labor Affairs, the Industrial Development Bureau, the National Palace Museum, and the National Science Council. Third, the National Science Council (NSC) sponsors The National Digital Archives Program (NDAP), officially established on 1 January 2002. This project promotes and coordinates content digitization and preservation at leading museums, archives, universities, research institutes and other content holders in Taiwan.

According to Huang Chung-Kuang (2007), Taiwanese DCIs operate under a very complex regulatory environment and this situation leads to conflict and duplication of resources and administration. These overlapping bureaucracies also lead ‘turf wars’ in Taiwan. As I discussed above, the Digital Content Industry Promotion Office (DCIPO) is in charge of DCI project management. The Digital Content Institute (DCI) is in charge of DCI skills

Development Plan formulated by the Council for Economic Planning and Development (CEPC), Executive Yuan. Before that, The Executive Yuan, the highest administrative organisation in Taiwan approved The Plan to Enhance Digital Content Industry in May 2002 via six programs including: “Environmental Construction and Regulation, Training and Recruiting Talents, Promoting Investment and Financial Assistance”, “Research, Development and Application”, “International Marketing and Information” and “Promotion and Expansion.” The Digital Content Industry Development Team, Executive Yuan was set up to organize the planning,

70 training, assistant and guidance service, and publishing the White Paper. The Government Information Office (GIO) is in charge of TV, broadcasting, and film industries, while the Ministry of Education supervises the E-learning industries. The National Communications Commission (NCC) is a regulatory body to oversee Taiwanese telecommunications, information and broadcasting sectors within an integrated framework. It regulates the transmission content ratings and channel distribution. The Ministry of Transportation and Communications regulates the Internet. On another level, the Taipei Computer Association (TCA) is in charge of Taiwanese DCI’s marketing and promotion, such as 2006 e-Learning World, Taipei, 2007 Taipei Game Show and 2007 Digital Content Award. In addition, the Industrial Development Bureau Ministry of Economic Affairs is charge of superior of Digital Content Industry Promotion Office (DCIPO), The Digital Content Institute (DCI), and Taipei Computer Association (TCA), coordinates regulations, and makes final decisions.

In addition to the above institutions, Ministry of Economic Affairs also established the Nankang Software Park, which focuses on software development, digital content, IC design and biotechnology. The Digital Content Assets Appraisal and Investment Service Center that subsidizes half of the valuation fee of digital content companies and provides financing and investment services, and Industrial Technology Supporting Center is also the support base for Taiwanese digital content firms.

Huang Chung-Kuang (2007) has discussed current Taiwanese government DCI policies. He said Executive Yuan had formulated the first stage, The Plan of Enhancing Digital Content Industry from 2002 to 2006, and is currently conducting the second stage plan from 2007 to 2011. The second stage focuses on government funding, favorable loans, guidance and assistance, and favorable tax treatment. In detail, the government will allot funds to support start-up enterprises and small studios, assist the DC studios’ operation, and establish cultural parks and incubators with local government. For example, Digital Content Industry Promotion Office (DCIPO) is planning to establish the culture-oriented industrial parks in Guandu or Shilin, cooperating with Department of Cultural Affairs (DOCA), Taipei City Government, to integrate and centralize all culture-related events and resources. The intent

promotion and assessment matters in digital content industry’s promotion, digital archives, and e-Learning.

71 of this goal is to make Taipei into a tourism and cultural center. A bill concerning the act for the development of digital content industry, named The Digital Content Industry Development Statute was drafted by Technology Law Center of Institute of Information Industry, and introduced by the Industrial Development Bureau, MOEA, and the first draft was passed in the Legislative Yuan in July 2007.

Huang Chung-Kuang and Claire Hsu (2007) also mentioned three ways by which the Taiwanese government assists in promoting DC products: exhibitions, cooperation with international companies, and the introduction of international experience to improve Taiwanese DC human capital. Firstly, it assists in exhibiting abroad as this promotes the image of Taiwan. Some firms have made deals directly in the exhibition field. For instance, Taiwanese game firms have participated in the E3 exhibition in the USA, and in the Tokyo Game Exhibition in Japan since 2004. In addition, 15 Taiwanese digital content firms include Xpec, Tvbean, Interserve, Deyi, Xiji, and Leijue were assisted to cooperate with major international digital content firms mostly Japanese and US, in 28 separate projects in the amount of $US 123.3 million in 2004 (Digital Content Industry Promotion Office, MOEA 2007, Achievements).

Those exhibitions were assisted by the government first, and transferred to labour unions later. Because the exhibitions are not presented by senior decision-making staff, a second strategy is to arrange for Taiwanese firms to visit major companies with the aim of achieving high-level management relations. The third way is to invite major DC firms, producers and investors to visit Taiwan. Currently, The Digital Content Institute (DCI) is emphasising the European market and is assisting as a matchmaker for vast projects. For example, ten Taiwanese digital content firms exhibited at the Taiwan Hall of MIPCOM in France, each one received twenty inquiries about cooperation on average, and the expected total amount of those projects is $US 93 million (Digital Content Industry Promotion Office, MOEA 2007, Achievements).

Another significant problem in Taiwanese digital content firms is capitalization. Interviewees pointed to an immature finance system and insufficient government subsidiaries. DC products have high fixed costs and low, even close to zero, reproduction

72 costs. An excellent DC product needs a long time to create, plan and produce. Even an online game needs two or three years to plan, produce, pretest and launch, as does an animation film. According to Howkins (2001,147), globally the banks’ attitudes towards intellectual property- copyright, patents, trademarks, and designs, became more favorable throughout the 1990s, For example, Disney issued seven-year loan notes in 1992 worth $ 400 million, using film copyright as collateral. However, this situation is still an ideal in the Taiwanese DCI economy. In addition, Taiwan is a creditor-friendly country. The legal system protects creditors from the making investments. Investment in DCIs is also a risky business, as evidenced by the dot.com crash of 2001.

This illustrates the difference between pan-Chinese societies, whose characteristics are to have higher average levels of savings, and Western societies, where it is much more common for people to acquire personal debt. Digital content industries have particular difficulty in acquiring loans in Taiwan. Claire Hsu (2007) believes the economic valuation of intangible assets such as DC products is still a big problem in securing investment. Even though Taiwanese banks would acquire accurate valuations and confirm that collateral (DC products) are really costly, the banks still tend to reject the loans. For example, a professional company American Appraisal valuated Eastern TV’s (ETTV) TV films in 2002, and the appraisal report presented the intangible assets of ETTV at $US 119 million dollars. ETTV tried to employ these TV films as the collateral to apply for funds from banks, but the result was still negative. The valuation of TV films is changeable with time and Taiwan does not have regulations that clarify copyright, in particular how copyright would shift from creditor to debtor as a common mortgage. In addition, Taiwan does not have any insurer to provide ‘completion bonds’ for intangible assets. This refers to commitments such as if the digital content company was unable finish the DC products, the insurer would take responsibility to find a new buyer to complete the DC products and in this way get the money back. With this kind of mechanism in place the banks would reduce their risk and provide the funds to those digital content companies with high valuable intangible assets.

Huang Chung-Kuang mentioned four types of support from the Taiwanese government. First, the Industry Development Bureau (IDB) utilities its science and technology budget to

73 assist DC industries in upgrading their technology. It provides R&D grants to special projects under the Regulations for Assisting Development of Leading New Products. Second, The Ministry of Economic Affairs (MOEA)’s Department of Industrial Technology also sponsors R&D projects conducted by industry and academia, and subsidizes the planning and development of critical, forward-looking industrial technologies. Third, the Development Fund of the Executive Yuan collaborates with banks in providing various kinds of special low-interest loans each year. The loans include those for R&D, and small and medium enterprises, etc. Fourth, the Development Fund of the Executive Yuan also provides mid-to-long-term financing for major investment projects in amounts of US $3.07 million dollars or more upon application by private enterprise. By 2007, five projects had been accepted. In Huang’s opinion, the effect of Development Fund of the Executive Yuan mid-to-long-term investment projects is not yet obvious, because it is a kind of investment.

Claire Hsu (2007) discussed how Taiwanese small and medium-sized enterprises (SMEs) that lack sufficient collateral could acquire the loans. The Small and Medium Business Credit Guarantee Fund, which is a non-profit organization founded by the government together with financial institutions, provides credit guarantees to qualified firms. The weakness in this model is the high interest rate and service charges that accrue. Taiwanese DC firms also look for bank financing, but need to furnish some security, usually land or a house.

According to Digital Content Industry Promotion Office, MOEA (2007, Achievements), by 2007 it had assisted 13 digital content companies to obtain funds through The Digital Content Industry Loans on Favourable Terms. It provided $ US 11 million as the guarantee money in assisting 35 digital content firms in obtaining funds through the Lending Program to Promote Industry Research and Development in the amount of $ US 21.9 million. The Digital Content Industry Promotion Office also assisted eight digital content firms, which include TVbean, Reality-Matrix, Deyi International, Huiju Multimedia and Miluku, to apply for tax breaks with letters of approval. However, the pressure of financing is still high and results in high levels of firm exits.

74 Because of the high number of small and medium enterprises (SMEs) in Taiwan, this represents a point of contrast to China, where state intervention continues to assist larger favoured domestic players. In particular, the role of the state further illustrates why business practice such as guanxi are important to Taiwanese business in Mainland China. Yang Chih-Hung (2007) believes because the capital problem is exacerbated, there are not many large-scale horizontally integrated DC enterprises in Taiwan. It is difficult to maintain control over different parties in the digital content industry. This, he suggests, is unfavourable to Taiwanese DCI’s development. However, Claire Hsu (2007) dismissed this by saying that Taiwanese games industries do not have so many capital problems, as a lot of large-scale companies have already gone public.

Claire Hsu contends the small Taiwanese domestic market presents another difficulty for DC firms. She argues that the Korean market is twice the size of the Taiwanese market; while the Japanese market is probably ten times that size. In addition, Taiwanese cable TV has over one hundred channels, resulting in cost-competition. Consequently, animation films or other digital audio/ visual products are unable to earn comparable profits. If Taiwanese DC firms do not expand their export market, the costs of production will increase. However, the problem of competing with Japan and Korea remains. As I have discussed in early chapter, these countries have established themselves as market leaders.

Huang Chung-Kuang also mentioned the unique political ecology of Taiwan that leads the government to seek to equalise profits in many industries. If unfair practices are suspected, this can easily result in a dispute. He argues that the government prefers to adopt the principle of equity, with the result that DC firms are assigned minimum support or subsidy. However, Huang feels that this results in minimal effects.

In order to solve the problem of the restricted domestic market Taiwanese DC firms seek to expand overseas. The Taiwanese government has emphasised the development of games, animation, E-learning, and E-publishing industries. The most successful exports are games and animation products 14 . For example, Gamania has a branch in Japan, Softworld has

14 The animation industry has participated in the international market through co-productions for some time. I

75 branches in South Asia, and XPEC has subsidiaries in USA. The Taiwanese games industry is mature compared with other digital content industries. During the initial period in the 1980s, there were many studios for the games industry. At present, however, the industry environment is complicated because a lot of new games hardware has appeared, such as XBOX 360 or PS3. However, Huang, a manager of Digital Content Industry Program Office of Economic Affairs (2007) believes a shortcoming of Taiwanese DCI is that there is too much emphasis on technology, and sometimes there is tendency to follow the work styles of manufacturing industries.

In brief, there are two main problems in the societal environment of DCI in Taiwan: securing capital and restrictions of the tiny domestic market. In order to acquire more capital and markets, Taiwanese digital content firms need to expand international markets, especially the pan-Chinese market.

China entered the WTO in December 2001. WTO entry meant the opening up the Chinese market for foreign firms, including digital content firms. However, Taiwanese firms also face uncertainties such as Chinese DCI’s protection policies, ongoing political issues between China and Taiwan, piracy, and large amounts of overdue receivable bills.

Claire Hsu believes the Chinese government is trying to protect the local software and animation industries. The Chinese government restricts imports of foreign games to ten per year. According to The Regulations of Foreign TV Programs Import and Broadcasting in The State Administration of Radio, Film and Television Document 42(2004), foreign TV dramas (including animations) cannot be broadcast during prime time (19:00-22:00), unless they acquire permission from The State Administration of Radio. Foreign TV dramas (including animations) cannot exceed 25 percent of all TV dramas (including animations) per day per channel. Such regulations have resulted in some Taiwanese firms choosing to become registered as Mainland firms. This is done by choosing a suitable Mainlander to apply as a nominal ‘Chinese firm’ for them, or some Taiwanese owners choose to become

employ Wang Film as an example of this practice in chapter 5

76 citizen of CPC 15 .

Changing policies also lead to weaknesses in the entrepreneurial environment. Claire Hsu cited an example in which Taiwanese games firms were ranked first in China in 2000. The Chinese government then enforced a regulation to limit ISP firms in the management of online games (The Interim Procedures of Internet Culture Management in Ministry of Culture Document 32, Ministry of Culture 2004). Foreign firms could only cooperate with Chinese firms and obtain permission from State Council to operate ISP (The Regulation of Internet Information Service Management in State Council Document 292, State Council 2000). By July 2004, this regulatory change led to many Taiwanese games managers reducing their research and development investment in China, and even terminating their businesses. Because of this changeable regulatory environment, and the need to monitor and respond quickly to policies, the Taiwanese government does not encourage Taiwanese firms to invest in Mainland China.

Zhu Chun-Yang, a Lecturer of School of Journalism, Fudan University (2007) mentioned administrative power as another difficulty of investment in China. If foreign firms manage to leverage beneficial relationships with officials, administrative interference can be diminished. However, if officials cannot gain any benefit from these investments, obstruction from administrative power can be very significant. Nevertheless, Li Ben-Qian (2007) believes that the Chinese government has deregulated some areas of DCI. According to the 2001 GATS commitments, publishing industries in China would open progressively, and the content industries would be allowed to cooperate and co-produce with Chinese firms. Only the news industries remain completely closed. However, with Blogs and BBS expanding rapidly, Internet polices are increasingly difficult to control. Li (2007) says that the establishment of Chinese websites is relatively easy through a related newspaper office, TV station, and publishing house. The founder needs to pay an application fee of $US 247 dollars. An ISP cannot issue news but can reformat news from traditional media monitored by Internet police.

15 It is difficult to check whether people have dual citizenship (for Chinese and Taiwanese governments) at present.

77

If foreign DC products are amusement-focused, it is easier to enter Chinese markets, and these are also relatively freer in terms of regulatory supervision. At present, the Chinese government is friendly to foreign DC firms, because these firms not only promote the local government’s achievements, but also bring in the tax revenues and offer employment opportunities. As the result, industrial parks are being established; and entrepreneurship is encouraged. Many exhibitions about investing in China are conducted abroad. In addition, local firms and foreign firms cooperate in projects such as copyright cooperation and technological development.

This friendly climate was verified by George Chang, the president of Wang Film (Suzhou) who said that officials have treated his company Wang Films very positively. Favorable policies in the initial stage included tax reductions. At present Wang Films still enjoys reductions in rent. According to Chang (2007), the local government is offering other favorable tax and rent policies to attract Wang Films move into the Suzhou industrial park.

The attitude of Chinese and Taiwanese governments also impacts on the Taiwanese DC firms’ entrepreneurial environment on the Mainland. Huang Chung-Kuang (2007) believes that because China is a fast growing economy, there is still an open attitude to Taiwanese firms. On the other hand, the Taiwanese government has made its own regulations. For example, The Regulation of Investment or Technique Cooperation in China in Ministry of Economic NO.09509027890 (Investment Commission, MOEA 2006) proposed the limit of accumulative total investment amount or percentage in China as below Table 4.1.

78 Table 4.1: The Limit of Accumulative Total Investment Amount or Percentage Invest in China Source: Investment Commission, MOEA 2006. http://www.moeaic.gov.tw/system_external/ctlr?PRO=LawsLoad&id=9

The political tension between the Mainland and Taiwan also impacts upon business. Yang Chih-Hung, the Dean of School of Communications at Ming Chuan University mentioned the importance of cross-straits policies; if the relationship between Chinese and Taiwan is tense, this can be unfavourable to Taiwanese firms. Indeed, some Taiwanese firms adopt the Mainland as the core and cut their associations with Taiwan. If the cross-straits relationship is conducive, Taiwanese entrepreneurs can combine the strengths on both sides, and achieve better results. Edwin W.K. Lo, the chair of Department of Advertising at Chinese Culture University believes that if the ideology of socialism could open more, Taiwanese digital content firms would be able to build more DC enterprises. Lo also suggested that intervention by the Taiwanese government would make it difficult to repatriate investment and profit. This in turn impacts on Taiwanese DC firms’ entrepreneurial environment in China.

Piracy and IP violation are another important problem in entering the Chinese market, especially in Chinese DCI entrepreneurial environment. According to The Regulation of Copyright in People’s Republic of China in State Council Document 359 (State Council 2002), article 36 proposed the copyright administrator just apply punitive measures, a fine of less than three times the illegal profit, under US$ 12,350, when someone violates the copyright law. That means IP offenders in China just need to bear civil liability, and not criminal responsibility.

Claire Hsu (2007) believes that piracy in China restricts Taiwanese DC firms from earning

79 significant profits. For example, one of the leading software firms, Ulead, has earned a steady and large profit in the United States, but it cannot achieve similar benefits in China. Other interviewees agreed that piracy was damaging business. One of the companies, Artkey, tries its best to limit piracy, by employing anti-counterfeit laser labels or reducing as low as possible dot per inch (dpi) in some specific products to make reproduction more difficult.

However, other Taiwanese DC firms do not take the piracy issue so seriously. Cheng Yiwei (2007) mentioned Somode, which has not employed a DRM system. Because Somode’s main income is advertisement fees, it is not as concerned about IP violations. When Somode faces piracy issues, it sends a lawyer’s letter to warn pirates but also advises that Somode can authorize the content to them legally. They just need to refer the source of content, and add some official icons of Somode. Those actions not only remind the offender of the importance of copyright, but also enhance the name of Somode’s digital magazines.

The term guanxi is more widely used than the two common translations ‘connections’ and ‘relationships’ to describe the basic dynamics of personalized networks of influence in pan-Chinese society. All interviewees identified guanxi as very important in China, especially official guanxi. I will discuss this concept in detail in chapter seven.

To enter the Chinese market, Taiwanese digital content firms not only confront the immature environment, but also face the uncertainties in China, such as protectionist policies, ongoing political issues between China and Taiwan, piracy, and large amounts of overdue receivable bills. In the next section, I will introduce more challenges from foreign competitors in the task environment of digital content industries.

Task (Industry) Environment

The task environment describes competitors, government, stockholders, special interest groups, customers, creditors, communities, suppliers, employees/labor unions, and trade associations (Wheelan and Hunger 1997). In the following sections, I will inspect Taiwanese digital content firms’ competitive advantages in the Chinese market through comparing with other foreign competitors, such as Korea and Japan.

80

Most interviewees consider that Taiwanese digital content companies have short-term competitiveness in China, mainly because of the advantage of the language, racial ties, the understanding of China, management, creativity, and good maintenance of Chinese traditional culture. Claire Hsu, a section manager of the Institute for Information Industry maintains that Taiwanese firm’s advantages are quality products with low cost by the Original Equipment Manufacturing (OEM) model, and Taiwan is the proper partner to enter Chinese-language market. Chinese firms are very familiar with local market conditions, but they are less familiar with American and Japanese work styles. In addition, according to Hsu (2007) Taiwan is a leading country of fashion and creativity; for example, it has achieved great export success in music and variety shows in Southeast Asia.

Another cultural advantage relates to history. Because Chinese have strong historical memories of Japanese aggression, Japanese DC firms have experienced difficulties in market entry. However, Japanese DC firms often obtain good results via relationships with Taiwanese firms. For example, Softstar had a successful joint venture with Japanese firm ENIX in 2001. Their Magic Babies had the highest occupation rate of the Chinese role-playing games (RPG) market. In addition, the Chinese government tries to resist American and Japanese influences on culture.

Several respondents agreed that many Chinese people have negative views against Japanese products; some also have different views on Korean products. Edwin W.K. Lo (2007) also agrees that Mainland Chinese firms have more friendly racial ties with Taiwanese firms than those in Hong Kong, Japan, and Korea. Edwin W.K. Lo (2007), however, believes that some of the Taiwanese competitive advantage has lessened since the Chinese economic reform. Li Ben-Qian (2007) agrees. Since China entered the WTO, Chinese people have come into contact with many foreign digital content products, and for this reason Taiwanese cultural products will find it more difficult to be as popular.

Nevertheless, because the Chinese government imagines Taiwan will reunite with the Mainland in the future, they include Taiwanese culture as local. There are special

81 regulations for Taiwanese firms that cooperate with local firms. In sum, the competitive advantage of Taiwan is creativity, cost and work style. Jamy Lin (2007) also believes that because Taiwan was a colony under Dutch and Japanese, Taiwanese DC firms are able to receive outside culture. Thus, cultural differences experienced in cooperation with foreign firms are not necessarily an obstruction.

From a human capital perspective, George Chang (2007) thinks that Taiwanese and Chinese animation industries should cooperate more in personnel training. China is a good manufacturing base for Taiwanese firms. Because both communicate in Chinese, the expenses of translation and associated transaction costs are reduced. If Japan or Korea wants to take the place of the Taiwanese OEM market, for instance, they face the problem of such costs. Moreover, Claire Hsu (2007) believes the Taiwanese digital content industry will face competition from Chinese human capital in the near future. The Chinese government is focusing heavily on growing indigenous digital content industries and for this reason some Chinese digital content firms are earning more rewards, and attracting more highly qualified talents.

Jamy Lin (2007 Interview: 14 Feb) nominates other competitive advantages, including the integration of Taiwanese digital content industry from upstream to downstream and experience in management, especially in marketing and finance. Huang Chung-Kuang (2007) believes that Taiwanese firms are good at management. For example, Softworld uses street hawkers as its important distribution channels to sell their PC games and achieves significant success.

Comparing Taiwan with other nation’s firms, Zhu Chun-Yang (2007) believes Taiwanese firms still maintain advantages. China is now in the process of reengaging with Confucian culture. The level of Taiwanese maintenance of Chinese traditional culture is higher than China at present. Alex Guo (2007) agrees and believes traditional culture has revived in China recently. A lot of Chinese people study the Four Books, and the Five Classics. In addition many Confucius Institutes have been established throughout the world.

82 As I discussed above, the domestic demand in Taiwan is relatively small. The market size in Taiwan is two times smaller than Korea, and ten times smaller than Japan. However, the scale of the Chinese market is quite extensive. ‘Related and supporting industries’ in Taiwanese digital content industries are traditional media, such as music, TV dramas and TV variety show, applied software, high-tech hardware, such as MP4, mobile phone, PDA, and so on. Most of interviewees believed the Taiwanese DC firms’ main competitors in China are Japan and Korea, and that these are superior to Taiwan at present.

Yang Chih-Hung (2007) believes Japanese and Korean DC industries are more advanced than Taiwanese and Chinese DCI in several fields, such as human capital, market systems and international experience. In this respect he ranks Japan first flowed by Korea, Taiwan and Mainland China. He believes that Taiwanese DC companies have better technology, freedom, and international experience than China, but the disparity between Chinese and Taiwanese DCI is not so great. The problems facing Chinese DCI are the immature financial system and a lack of personal freedom. Zhu (2007) also agrees that Japanese and Korean games and animation products have registered great achievements in China. Before 1992, the Chinese and Japanese governments had a good relationship, thus Japanese TV dramas and music had been popular in China. However, Korean DC products assumed a leading position after 2000.

Li Ben-Qian (2007) also mentioned that Japanese TV dramas exerted a vast influence on the initial stage of Chinese reformation. At present, Chinese DCIs are hit by the ‘Korean wave fever’. Because of the homogeneity between Taiwan and China, some Taiwanese DC products do not have the same strong attraction. Comparing Chinese and Taiwanese DC industries, Cheng Yiwei (2007) agrees that Taiwanese DC industries have some advantages in China. He believes the music and entertainment industries are very creative while Chinese creativity is weaker at present, a fact related to the length of the democratic period in Taiwan. Zhu Chun-Yang (2007) notes there are some media heroes, a more mature market system, and pure entrepreneurship from private capital in Taiwan.

Claire Hsu (2007) believes that the DC companies in Taiwan, Mainland China, and Hong

83 Kong can cooperate. They could derive creative talent, production experience, and international marketing experience from Taiwan, financial experience from Hong Kong, and large-scale markets, government support, basic skills, capital, and economies of scale from China. They would then form an industry chain that would have long-term competitiveness.

Internal Environment

Internal environment refers to structure, culture, and resources in organization as I discussed in chapter two (Wheelan and Hunger 1997). Most interviewees identified that fewer administrative levels, regular meetings, proper award systems and partner-like enterprise cultures foster entrepreneurial environments in DCIs. However, Taiwanese DC companies’ strategies still start from the managers, especially the CEOs. Bob Deyou, the president and CEO of CnYES (2007 Interview: 3 Mar) and Bonny Hu, the Shanghai president of CnYES (2007 Interview: 5 Jan) both agree that CnYES’s strategies are mainly initiated by the president first, and then carried out by employees. Eric Shan, a planner and art editor of Shanghai CnYES (2007 Interview: 5 Jan) explained that Deyou creates the developing direction and performance’s target for Shanghai CnYES every year. According the Overall Plans, Bonny Hu makes more detailed plans including to-do lists such as Shanghai CnYES Internal Plans. Following this, the staff of Shanghai CnYES submits proposals according to these plans, and then waits for the final decision from the Taipei office.

On the other hand, Bob Deyou (2007) told me, ‘I also do my best to support the strategies proposed by staff that involve small amounts of money. However, if the project has too much financial risk, it is necessary to discuss it in a board meeting’. According to Deyou (2007), CnYES’s Taipei office is in charge of most entrepreneurial strategies, such as strategic alliance, research and development. CnYES (Deyou 2007) also utilizes a bonus system to reward excellent strategies. There are business bonuses, planning bonuses, and quarterly bonuses. The amounts of bonuses are usually 5 to 10 percent of the case income.

The intercommunication between Taipei and Shanghai branches of CnYES is very close.

84 Bob Deyou often uses telephone and E-MAIL to exchange opinions or conduct weekly meetings with staff directly. He goes to Shanghai frequently. Staff members suggest or discuss cases via weekly work sheets. In Eric Shan’s experience, less than a week is spent from submitting a proposal in Shanghai to Deyou’s comments, resupplying and returning to the presenter to implement. The percentage of execution is very high. If inconsistency happens, the Taipei and Shanghai presidents will coordinate. Shan feels those procedures are quite transparent. According to Shan (2007), project presenters also plan the resources including manpower, software, hardware, and budgets in their proposal, but they limit these within existing resources in Shanghai as much as possible. Some projects require cooperation with Taipei staff, especially art editors, and IT engineers.

According to Alex Guo (2007), Artkey’s strategies also start from the CEO mostly, and are then discussed with section directors. There are four independent directors in Artkey each in charge of the Taipei, Beijing, Shanghai, and international sections respectively. There are three centres in Artkey: the innovation centre in charge of creativity; the marketing centre in charge of sales, and the operation centre in charge of human resources, finance, and legal aid. Each centre has directors who are responsible to the CEO directly. Although Alex Guo mainly stays in Shanghai now, he still has meetings with the directors each week. There are always new ideas or new projects. Alex Guo believes that in forming an excellent entrepreneurial environment, the best policy is ‘set an example’. Staff members in Artkey obtain knowledge from in-house and external training, and from book clubs.

The four founders, especially Chang Jiaming, lead most entrepreneurial strategies in iPartment similar to the other cases. Jamy Lin (2007) believes there is not a very obvious concept of class in iPartment, resulting in high creativity from staff and company rewards for innovations. For example, workflow can be improved at every position from planning and design, to IT. Somode also encourages staff to put forward new ideas and an enterprise culture that encourages staff to make mistakes.

In general, section managers determine Somode’s strategies. Sometimes, project managers also propose strategies. Somode holds weekly brainstorming with section managers and

85 group leaders to discuss entrepreneurial strategies. The format of Somode’s electronic magazine was developed by a casual brainstorm held in Mountain Yang-Ming. In Cheng Yiwei’s opinion, many little attempts can make a vast wisdom. Staff need not be scolded for mistakes; it is just an experience, and this represents a good way to prevent a heavy mistake in the future.

4.4 Conclusion

I proposed a series of questions in Chapter one. I will discuss the first of these in the final section of this chapter How have small and medium Taiwanese enterprises managed to compete in China where policies favour the growth of domestic enterprises?

I found out that significant difference exist between entrepreneurship in Taiwan and China. Taiwan has established a long history of entrepreneurship. There are a variety of contending features within entrepreneurship in Taiwan: the ability to bear hardships, diligence, entrepreneurial spirit, conservatism, and creativity. Most interviewees regarded entrepreneurship in the digital content industries in Taiwan as stronger than in China. Interviewees also believe features of entrepreneurship in China include elements of heroism and opportunism.

I discussed Taiwanese DC companies’ entrepreneurial environment in China through three frames: societal environment, task environment, and internal environment. I concluded that together with the government’s DC policies, there are problems in securing capital and restrictions of the tiny domestic market in Taiwan. This also reflects pan-Chinese societies, where have higher average levels of saving are seen than in Western societies. However, it is much more difficult for people to acquire personal debt. The interviewees also demonstrated that guanxi indeed plays an important role in Taiwanese DC companies’ entrepreneurial societal environment in China.

Following this, I discussed how Taiwanese DC firms have short-term competitive advantages in China, mainly because of advantages of familiar language, racial ties, an

86 understanding of China, management, creativity, and good maintenance of Chinese traditional culture. That also demonstrates that culture proximity between Taiwan and China can be a competitive advantage of Taiwanese digital content companies. However, the competitive advantages of Japanese and Korean DC products in some individual sectors, such as online game and animation films are superior to Taiwanese ones at present (task environment). Yet, the competitive advantages of Japanese and Korean digital content product are mostly based on the product quality, not business skills in China.

Finally, I noted that Taiwanese DC firms’ enterprise culture has fewer administrative levels, regular meetings, proper award systems and partner-like enterprise cultures. However, Taiwanese DC companies’ entrepreneurial strategies are still initiated from managers, especially CEOs (internal environment).

87 Chapter 5

The chapter examines two rationales for Taiwanese firms moving operations to Mainland China: cost reduction and market penetration. Although digital content is an industry where costs are diminishing (compared to analogue media) some industry sectors rely on time consuming production processes. The cost of labour initially forced production from US studios to Taiwan; in more recent times the production has moved to China. The examples in this chapter illustrate China’s competitive advantage in low cost production.

However, the question to ask is: does Taiwan move up the value chain in this process of offshoring and outsourcing? In order to explain this transformation process, I will examine the history and evolution of two companies: Wang Film and Artkey. The first, Wang Film, has taken advantage of low cost production, while the second, Artkey, is looking to exploit artistic traditions and resources within China. Another reason for choosing these two examples in this chapter is that they are examples of companies that are off-line, in the sense that their products are produced in more traditional formats; for instance animation and artworks. In the following chapter I will then look at companies whose operations are predominantly web-based.

5.1 Wang Film: Labour-intensive Firm in China

Keane (2007) has proposed five layers in China’s ‘creative innovation ecology’ to argue how creative industries move up the value chain from making for others to making original content. The first layer ‘low-cost production’ describes the relocation of much standardized production from developed countries to China for low-cost advantage. The second layer is ‘imitation’, a key element in the rapid growth of media industries in China over the past decade or more. The third layer, moving up the value chain to ‘co-production’ and ‘formatting’, provides more ‘legitimate’ and international market opportunities. By learning from global experiences and sharing resources, businesses are able to add value to their products and services. The ‘East Asian creative economy’ is the fourth layer of the ecology. China’s proximity to East Asian markets potentially increases the advantage of its cultural

88 resources. The fifth layer, the ‘industrial cluster’ or milieu, has became a competitive growth strategy for Chinese policymakers concerned with regional economic development (Keane 2007).

The evolution of Wang Film also corresponds with this model. Due to the time consuming and labor-concentrated nature of the animation industry, Suzhou Wang Film first outsourced its production in China, eventually enhancing its competitive advantage with co-production and original content. James Wang, the founder of Wang Film, acquired the master of audio-visual education in the University of Indiana in the USA. Upon graduation, Wang worked at a New York design firm and then at the Hanna-Barbera animation firm for several years. In 1978, James Wang was supported by Hanna-Barbera, allowing him to return to Taiwan to establish Wang Film. Wang spent $US 61,000 in setting up his company, which became the world’s largest animation contracting company by the 1980s (Gao 2004, 40). The number of employees increased from 100 in 1978 to 1,400 in 1998.

Several animation films produced by the company had significant achievements in the 1990s. These included the Smurfs (cooperation with HBO), Tiny Toon Adventures , and Rugrats 16 . Wang Film won a total of seven Emmy Awards. Because of insufficient financial resources during its early period, however, Wang Film had OEM rights but was not able to develop a great deal of original content. The term OEM here is used to refer to the process of outsourcing production in animation industries, usually to low-cost locations. In this instance, foreign animation firms designed the characters and storylines, and then Wang Film finished the whole films following their instructions. Under this model, Wang would obtain a flat production fee. According to Chang, this represented a 7~10 percent profit margin; the focus therefore was on process innovations such as cost-reduction and efficiency to obtain a large amount of foreign orders. James Wang, the founder of Wang Film said,

16 The Smurfs , the cooperation TV firms with HBO, won two Emmy Awards for Best Children’s Entertainment Series in 1982, 1983, a Bronze Award in 1987, a Humanitas Award for Best Animated Series in 1987, and won five years audience-rate champion in the USA. The Jetsons won the Youth in Film Award for Best Animation in 1987. The Little Troll Prince won the Angel Award-Silver Angel in 1988. The Greatest Adventure won the Angel Award-Golden Angel in 1988. The Flintstones won the Youth in Film Award for Best Animated Series Yachts in 1987, Humanitas Award for Best Animated Program in 1988, and Bronze Award- Best Television Animated Program in 1993. Cartoon Stars Against Drugs, a Public Service Film won the Emmy Award- Special Award for Best Public Service Cartoon for Children in 1990. Tiny Toon Adventures won the Emmy

89 ‘OEM is just a means, not an object. OEM equals bread and butter, if Wang Film does not have bread and butter, we can not exist, can not train animation talent, either.’ Wang Film spends US$ 300,000 per year for research and to train personnel. Wang Film uses profits from OEM to develop self- made productions (Chang 1999, 103). In this regard, Wang Film develops derivative goods and separates production and marketing17.

The company, though the joint venture with Hanna Barbera and other animation firms, has had opportunities to produce films such as The Adventures of Willy Beamish, Modern Little Wizard, Animal Treasure Island, Busy Town, and to share in profits and publication rights in some Asian areas. Wang announced, ‘In the past, we just made whatever our clients ordered, at present we realized that with such great chefs, we should open our own restaurant’ (Taiwan Cinemas, 2006).

Figure 5.1: Wang Film’s Animation Products Source: Wang Film official website (2007) http://www.wangfilm.com.tw/winner.php

Based on his experience, James Wang proposed the ‘small triangle’ and ‘big triangle’

Award for Best Animated Program in 1991. Rugrats won the Emmy Award- Best Animated Program. 17 Wang Film’s self-production animation films included Niu Bo Bo, Small Ding-Dong Battles Robots, and Warm Little Monk Family in the 1980s, The Quest of Magic, Little Monk, The God, The Taoist, The Goblin, Seeking Treasury Legend, Genius Anuo, Sun Tzu Military Strategies, Kavalan in the 1990s, and The Story of Grandfather Lin Wang, Journey to the West, Fire Ball, Fight, Fighting Chicken Boy in the 2000s (Gao 2004, 40). Apart from producing animation films with international cooperation, Wang Film also won a landslide victory: The Quest of Magic won the 29th Golden House Awards-Jury Award, and Annecy Award nominated. Kavalan, a co-production film with Taiwan Public Television Service, won the 36th Golden Horse Awards-The Best Animation Award. Journey to the West won the 2002 Taiwan Animation Prototype Design Award. In addition, The Story of Grandfather Lin Wang describes the lifetime of a famous Taiwanese elephant lived 86 years, won the 2003 Taiwan Animation Prototype Design Award (Ministry of Economic Affairs Digital Content Industry Office 2005-2006).

90 strategies. The small triangle refers to Japan, China and Wang Film. Because Wang Film has language and cultural advantages in China, it is an ideal partner for Japanese animation firms. Wang Film functions as a bridge to export or cooperate with Japanese animation products targeted at the Chinese market. On the other hand, big triangle means China, Wang Film and America. Wang Film has spared no efforts in cultivating and fostering relationships with Hollywood. To cater to Hollywood’s demands for confidentiality, Wang Film arranges exclusive work teams and work areas for different clients and has enacted strict confidentiality rules. As James Wang says, ‘Any paper, and semi-production all must be returned to clients’. James Wang is now seen as the animation entrepreneur with best-guanxi with Hollywood; the guanxi capital Wang has accumulated is part of the core competitiveness of Wang Film. Wang believes that because his company owns the American animation firms’ trust, and the understanding of China, it forms the two sides of the big triangle; the last side is Wang Film’s human capital and technique (Peng 1999, 97-98).

Animation industries involve time-consuming and labor-intensive work. The cost of labour is the main issue in animation industry management. From the 1960s to the 1980s, Taiwan was an excellent offshoring production base for Western countries. Over the past 20 years, Taiwanese labour expenses have been rising. Under this kind of environment, Wang Film decided to turn to China to operate production.

As I mentioned above, large parts of animation are still drawn by hand. 1-second animation is constructed by 12 frames, thus 22 minutes animation film needs 20,000~30,000 frames. The animation industry needs a huge amount of human resources (Peng 2003). In order to reduce the operation cost, Wang Film set up the Suzhou Wang Film in 1996 with almost 500 employees, and set up Bangkok Wang Film in 1997 with nearly 300 employees. After that, Taipei Wang Film reduced the number of employees to 400 employees in order to concentrate on high value-add products (Peng 1999, 97).

When I first arrived at Suzhou Wang Film on January 12, 2007, following an introduction by an HR manager, my impression was that the company was a little dark and old. From the

91 outside looking in, Wang Film is a factory-style digital content firm. I had a meeting with George Change who is the Suzhou president of Wang Film. Before our interview, Chang assigned his secretary to give me a ‘factory tour’.

George Chang gives the appearance of a traditional manager. He is also an eloquent, considerate person with a sense of humour. We laughed a lot during an interview, which was accompanied by countless phone calls. In my observation, most of his answers were conservative, and were based on standpoints of Wang Film, especially the founder James Wang. After the interview, I was invited to have a dinner with other Taiwanese managers at Suzhou Wang Film. During the trip from the company to the restaurant we continued our conversation.

George Chang related the history of the move into Mainland China. Wang Film had initially set up its Chinese branch in Zhuhai in Canton province before moving to Suzhou in 1996. Suzhou is known as the Chinese Venice. According to Chang Wang Film set up its Chinese branch in Suzhou for three reasons: First, James Wang grew up in Suzhou. Second, Suzhou is close to Shanghai. Many Taiwanese businessmen need to transfer to other cities in central China from Shanghai International Airport. A lot of meetings are also held in Shanghai. Therefore, the traveling distance to Shanghai is an important factor for Taiwanese firms. Third, the cost of manpower in the animation industry is higher than in Shanghai, and Suzhou also has cost advantage over than other bigger cities, such as Shanghai and Shenzhen.

Suzhou Wang Film provides full in-house service, from pre-production to product delivery 18 .

18 Suzhou Wang Film owns digital and traditional animation technology, including US Animation, Pegs, and Wang Film’s proprietary AniMaster digital systems. Suzhou Wang Film has produced 941 episodes, 4 home videos, and 5 feature films until 2004. It is regarded as one of China’s elite animation production companies by top-tier firms such as Warner Bros, Disney, and European companies such as TFC, SIP, and Darguad-Marina (Wang Films 2007).

92 Produced Quantity Main Animations Film Year (episodes) 1996 57 Sinbad, The Bible, White Fang, 10 Commandments 1997 94 Richard Scarry 5, CC mouse, Paddington Bear, Little LuLu 2, The Gnomes, Loggerheads 1998 82 Max & Moritz, Hercules, Lion Hearts, Timon 1 feature film: Gamalan & Pumba, Benjamin, Princess Sissi, Histeria, Pinky & the Brain, Gamalan 1999 114 George Martha 1, Little Bear 5, Dumb Bunnies, Blaster, Nick & Perry, Rescue Heros 2000 103 George Martha 2, Marvin 1, Scooby Doo, 1 home video: Timothy Tweedle Troll Tales, Mythic Warriors, Timothy Tweedle 2001 180 Karlsson, Marvin 2, TKKG, Sagwa, Momo, Stuart Little, Tosh, Tarzan 2002 101 H.C. Anderson, Little Wolf, Benjamin, 1 home video: Furry Tales Fillmore, Furry Tales, Jungo, Medico Family, Altair 2003 94 Major Power, Tonka, WeiQi 1, Nezha, The 1 home video: Bibi and Tina Captain Derrick, Werner-4, Bibi & Tina, The 2 feature films: Werner-4, The Winx, Looney Tunes Storyboard Captain Derrick 2004 116 World Reports, Candy Land, My Little Pony, 1 home video: Candy Land Dieter, Boule & Bill, Journey to the West, 2 feature films: Journey to the Wei ,Qi 2, Ping Pang, Brandy & Whisky, West, Dieter American Dragon Total 941 episodes, 4 home videos, and 5 feature films Table 5.1: Suzhou Wang Film Animation Productions up to 2004 Source: Suzhou Wang Film, edited by Researcher for this Study

Suzhou Wang Film is divided into two departments: production 1 and production 2. Production 1 is responsible for communicating the concept and painting style in the film to clients, and creating new products by manual drawing. Production 2 is in charge of the animation post-production with computer-based drawing. Suzhou Wang Film also has Flash department to produce computer short films and mobile content. However, Suzhou Wang Film’s OEM services only provide animation images; this does not include dubbing and music.

Suzhou Wang Film is an independent subsidiary of Taipei Wang Film. Suzhou Wang Film is comparatively successful, but there are technical transfers from Taipei Wang Film. Suzhou Wang Film and Bangkok Wang Film exchange information with each other, but remain totally separate in management. All subsidiaries of Wang Film adopt healthy competition and a profit centre system to control their own costs and income. In 2002, over forty percent

93 of Wang Film’s profit came from its Suzhou operations. Whereas Taipei Wang Film mainly does up-stream composition and animation movies, Suzhou Wang Film operates the down-stream and undertakes easier jobs, such as coloring, linking and scanning. Normally Taipei Wang Film and Suzhou Wang Film transfer image files by post DVDs; if an urgent case arises, then the files will be communicated through T1 system (1.544 Mbps per second) (Peng 2003).

George Chang says that ‘The core competitiveness of Wang Film is long-term experience of the animation industry’. In his opinion animation firms can be divided into A, B and C grade firms. Taipei Wang Film has already accumulated 30 years experience as an A grade animation firm. At present, Suzhou Wang Film has accumulated ten-year experience, but critical technology is still needed from Taipei Wang Film. Suzhou Wang Film is situated between B+ and A grade animation firm. Although there are many potential animation firms in China, most are still C or B grade firms.

Strategy #1: Human Resource Management

Another important resource in animation industry is human capital. According to George Chang (2007), because animation industry is a kind of artistic industry, it relies on manual drawing and for this reason it needs experience and good quality human resources19 . In general, an animation artist needs to undergo training for three to five years.

Suzhou Wang Film has created a work environment that allows its staff to produce animation freely. It encourages creativity. Furthermore, Suzhou Wang Film provides higher wages and better welfare conditions to attract employees. For example, Taiwanese DC firms mostly adopt the annual performance system in Taiwan. However, Suzhou Wang Film

19 According to Chang (2007), Wang regards the animation industry as a children’s-education entertainment industry. Wang regards fostering the animation industry’s human capital as a duty rather than a business. There are over 150 international animation professionals from Hollywood who visit long-term (at least six months) to transfer techniques to Taipei Wang Film, and the maximum is 38 foreign instructors in Taiwan at the same time. Wang Film has trained several well-known cartoonists, such as AoYouxiang’s Oolong Yuan, Lin Zhengde’s Young Gun, and Chang Zhenyi, the chief designer of Disney animation movie Mulan (Peng 1999, 97). Wang Film was also awarded the National Honor in Employee’s Cultivation / Training from Ministry of Economic Affairs (MOEA) in 1993.

94 noticed the Chinese standard salary was lower than Taiwan. Suzhou Wang Film has subsequently adopted a monthly performance system as well as auxiliary annual bonus systems in China. The monthly performance system is a quantitative evaluation system employing average monthly output as a benchmark criterion. If a staff member produces more than usual monthly output, he or she obtains financial awards that month. On the other hand, if the client complaint happens or the cost of specific films is relatively high, Suzhou Wang Film will use auditors to isolate the problem (Chang 2007).

In conducting other activities, Wu Chengneng, the former president of Suzhou Wang Film set up a relationship with Huqiu Technical Art School in training programs. Initially, Suzhou Wang Film selects qualified students from Huqiu Technical Art School and provides one-year training courses during the fourth grade period. After their graduation, these students will acquire another half-year of training in Suzhou Wang Film. This period is similar to the apprentice period of studying handicraft. After that, many students will formally join Suzhou Wang Film’s staff. George Chang believes Suzhou Wang Film has a strong reputation in China, and for this reason many students have a strong desire to participate in the selection. Through this mechanism, Suzhou Wang Film has trained over 10,000 professionals for the Chinese animation industry.

Strategy #2: Animation Satellite Factories

Another strategy of Suzhou Wang Film is related to human resources. Because of the global depression in the 1990s, customer budgets decreased and the gross profit of Taiwanese animation firms diminished. In order to build an efficient and cost-effective entrepreneurial environment, Suzhou Wang Film set up a flexible employee system called ‘animation satellite factories’.

According to George Chang (2007), Suzhou Wang Film owns five to six animation satellite factories (or animation studios) at present. Some animation satellite factories also pass these cases to other people. This situation is similar to the household subcontracting system in the 1970s in Taiwan. The number of employees in these satellite factories is high at present.

95 This situation increases the flexibility of human resource management and reduces uncertainty from the orders of foreign firms. Because employees of animation satellite factories are part-time workers, Wang Film can reduce the expenses of employee welfare.

Strategy #3: Partnership with China Central Television

Another strategy of Suzhou Wang Film is to build a long-term partnership with China Central Television (CCTV). CCTV has broadcasted four influential animations: Journey to the West (Xi you ji), Legend of Nezha (Nezha Chuanqi), The Adventures of Little Carp (Xiao liyu lixian ji) and Monkey King (huagushan meihouwang) in recent years. CCTV, Suzhou Wang Film, and Hongyang20 have cooperated with a 52-episode TV animation series, Legend of Nezha (see Figure5.2 below). CCTV invested over US $ 1.5 million, and spent three years to finish this film, which was broadcast by CCTV on 1 June 2003. The namesake comic book was launched by People Posts and Telecommunications Publishing House (PTPress) at the same time. As a result, the Legend of Nezha achieved national success: not only earning over US $12.4 million in advertising income, but also gaining over US $ 7.4 million in serial book sales revenue. Legend of Nezha also won the 7th Golden Children Award: The Best Animation Serial Film.

Figure 5.2: Animation Pictures of Legend of Nezha Source: CCTV official website (2007) http://www.cctv.com/youth/special/C10612/02/index.shtml http://www.cctv.com/youth/special/C10612/20030624/101041.shtml

20 Hongyang is another Taiwanese company in the beginning, but Hongyang sold 51% share to Jade Dynasty

96 Following this, CCTV, Suzhou Wang Film and Hongyang cooperated in another 52-episode TV animation series in 2007, called The Adventures of Little Carp (see Figure5.3). CCTV broadcast The Adventures of Little Carp three episodes per day both in Dafengche and Cartoon City, two of the most popular children’s channels during the 2007 summer vacation. After excessive competition, Foreign Language Teaching and Research Press Children Publishing Department won the publication contract. The Adventures of Little Carp also won The 3rd China International Golden Monkey Award: Best Animated Series and Best character Design in April 2007.

Figure 5.3: Animation Pictures of the Adventures of Little Carp Source: CCTV official website (2007).http://www.cctv.com/program/dhc/20060926/102268.shtml http://www.cctv.com/program/dhc/20060926/102287.shtml

Jack Jiang, Director at Shanghai Yappy Cultural & Media Productions Co. Ltd (2007 Interview: 29 June) says the animation industry is one of most vigorous industries in China. The problem is that CCTV has sufficient capital to produce high quality animations but refuses to share animation rights with production companies. Instead CCTV pays for the production.

The two cases in which Suzhou Wang Film has cooperated with CCTV demonstrate this process. George Chang (2007) mentioned that CCTV posts an official letter to some prestige firms to call for a bid before an animation production. Those bidding firms not only produce quality animations to attain CCTV’s demand, but also accept the price that CCTV pays for the service. Although Suzhou Wang Film cannot build its own brand in the Chinese TV animation market at present, it still receives considerable revenue from CCTV.

Group Ltd. in 2007. After that, the ownership of Hongyang belonged to a Hong Kong company.

97

Strategy #4: Original Content Export Fire Ball (hong hai er: jue zhan huo yan shan)

Wang Film aims to develop original content in China. James Wang hopes that the Pan-Chinese society will create an animation idol, instead of Mickey Mouse and Hello Kitty (Chang 1999, 104). A fourth strategy of Suzhou Wang Film is represented by a film led by Taipei Wang Film. Fire Ball was the first Taiwanese 3D animation movie; its script was rewritten from a traditional Chinese myth of adventure and fantasy called Journey to the West . The story is about the Chinese monk called Tripitaka who leads his fairy animal neophytes Monkey, Pigsy, Sandy, and Horse on a long journey to India in search of the Script of Wisdom and Truth.

Fire Ball cost over US$ 5 million and three years to produce. The Government Information Office (GIO) in Taiwan subsidized production with US$460,000 while the Department of Industry, Ministry of Economic Affairs also granted a US$1.6 million loan. Taipei Wang Film raised capital for Fire Ball by transferring production team salaries into investment capital. These ‘investors’ would share copyright according to their investment percentage.

Wang Film invited the acclaimed Taiwanese director Wang Toon to be part of the project. Wang Toon has directed a distinguished trilogy of Taiwan history Straw Man (daocao ren) , Banana Paradise (xiang jiao tiantang) and Hill of No Return (wu yan di shanqiu) , all of which were well accepted critically and commercially. Fire Ball is his first animation feature. Wang Film also invited a noted Taiwanese dramatist, Ji Weiran, to be Fire Ball’s scriptwriter, and sought celebrities such as A-Ya, NONO, Masa, Peng Qiaqia, Yang Guimei, and Chen Zhaorong (Jeff Chen) to be dubbed actors.

98

Figure 5.4: The Main Characters in Wang Film Self-produced Film Fire Ball Source: Wang Film official website (2007) http://www.wangfilm.com.tw/monkeyking.php

George Chang believes that the animation industry in China is immature and for this reason intangible assets such as animation are not accepted by many investors. Taiwanese animation firms find it difficult to get the support of banks, TV stations, toy manufacturers and other cooperative firms during the film-production period. There are currently only three ways to sell animation content in China: movie film, TV film and DVD (including legal and pirated versions).

Some animation industry experts believe that it is necessary to establish publication or marketing windows and put energy in public relations such as media and exhibition exposure (Wang 2004, 70). For example, Fire Ball21 previewed in Beijing New Dongan Cinemas on 1 Aug. 2005, and screened in Taiwan, Hong Kong, Indonesia and other Asian countries on 5 August 2005. Fire Ball was the largest investment animation film after Baolian Light (bao lian deng) in China. Beijing Children Art Theater Limited Company,

21 Taipei Wang Film, Suzhou Wang Film, Shanxi Film Studio, and Beijing Children Art Theater Limited Company co-produced Fire Ball. Film Distribution and Exhibition Corporation of China Film Group Corporation, Beijing Children Art Theater Limited Company, and Beijing Chuan- Jiang Association Film and Culture Limited Company co-published the Fire Ball.

99 which successfully launched the Maze (mi gong) and Hi, Cute (Hi, ke’ai) , was in charge of its distribution in China; this was the first time the Beijing Children Art Theater Limited Company had embarked upon movie production and publishing. Fire Ball created a new ticket retail model in China: pre-sell tickets online and through 10 box offices and deliver movies tickets to people homes (Mu 2005).

Wang Ying, the president of Beijing Children Art Theater Limited Company believes, that the idea of ‘combining the theater’ ticket promotion method with traditional cinemas was strongly supported by Beijing New Film Association (Beijing Youth Today 2005). Beijing New Film Association provided its three top cinemas to be the sales bases, including Capital Age Cinemas , New Dongan Cinemas , and East Circle Cinemas . In order to carry out the new model, Beijing Children Art Theater Limited Company bought all 3000 tickets in the 10 showings of Fire Ball among Capital Age Cinemas , New Dongan Cinemas , East Circle Cinemas , and Jinyuan Cinemas . Ticket sales in most box offices achieved immense success, especially in Capital Age Cinemas , New Dongan Cinemas , and East Circle Cinemas where weekend tickets sold out in advance.

In addition, the Beijing Children Art Theater Limited Company had a limited-time promotion with 20 percent discounted family tickets. Three people family package tickets were the most popular choice, and 90 percent of tickets were sold this way ( Beijing Youth Today 2005). Compared with Hollywood’s animation movies, Fire Ball’s production costs were one-sixteenth, but it was still difficult to compete with Hollywood’s animation movies internationally (Han 2005, 65). However, Fire Ball won the 50 th Asia-Pacific Film Festival Award, the 42 nd Golden Horse Award, and the 11 th China Movie Award for Best Animation in 2005. According to Taiwan Cinema (2006), Fire Ball gained US$ 245,000 at the Taiwanese box office and it ranked third among 2005’s Taiwanese films after Tsai Mingliang’s The Wayward Cloud (tianbian yiduo yun) and Jeffrey Cheng’s The Heirloom (zhai bian) .

The next stage of Wang Film’s strategy was to produce another animation movie film Marco Polo with international quality. In the past, most of Wang Film’s productions did not have

100 excessive production costs. Wang Film usually profits to increase investment in its operation. However, Marco Polo was a high-priced animation co-production with a Hollywood production team, and required US $43 million to produce.

The production of Marco Polo revealed an international ambition. Wang Film invited Tony Bancroft, director of the Mulan and Stuart Little , as director and Lance Hool, producer of Mr. Crocodile and Return from North Vietnam , as producer. Wang Film adopted the liability limit partners (LLP) system. Wang Film shares the profits with partners according to the contract in limited time (almost seven to ten years), but the intellectual property rights of Marco Polo belongs to GP, one of Wang Film’s subsidiaries. Wang Film also plans to license games, toys, mobile phones, and education firms to produce Marco Polo derivative products (Gao 2004, 42-43).

From this it can be seen that Wang Film takes greater risks than other Taiwanese animation firms. Wang Film adopts the US animation industry model from movie to TV , perhaps influenced by its clients and by James Wang’s experience in the US. It is a step forward. On the contrary, the creative process of Japanese animation industries is more conservative, usually from comic to TV to movie .

Jack Jiang, Director of Shanghai Yappy Cultural & Media Productions Co. Ltd believes that Wang Film’s focus on the animation movie film is closer to the work style of the American animation industry. The American model means the animation firms would launch the movie in cinemas first. If the movie is successful, then the animation firm will develop the TV film or goods. Although the movie might bring in huge benefits when successful, it is still a very high-risk strategy.

In order to integrate production resources, Wang Film has adopted different elements to their business model including 3D animation, software R&D, and value-added business. Wang Film invested in the 3D animation firm CGCG to co-produce 3D computer animation in 1998. Wang Film separated the technical department to form a new firm GopoMedia, aiming to apply its R&D animation and multimedia software to more areas in 2000. GopoMedia

101 utilized an original animation mixed vectors technique to develop ‘dynamical images’ software, which would allow users to easily create their own animations. The most notable software in GopoMedia, AniMaster System, is an easy learning, high output professional software. It has been used in Taiwan, China, and Europe (Small Business Innovation Research 2007). GopoMedia also has designed customer-lead ‘dynamical images’ software for primary school teachers. In fact, half of the schools in Taipei have adopted this software to create teaching materials (Gao 2004, 118) 22 .

Wang Film formed a joint venture with Softstar and CGCG in establishing New Art Game School to train animation and professional game staff in 2003. It set up GP as a professional digital content IMC company focusing on integrating resources with each animation project and global marketing. Wang Film invested in American Fat Rock in 2003 to become an important cooperative and distributive partner. In the future Wang Film will become a digital entertainment group (Gao 2004, 40-41).

In my observation, however, Wang Film misunderstood the Chinese TV animation market during the early stage of their market entry. According to George Chang (1999, 104), Wang Film planned to rewrite famous Chinese popular legends, including Outlaws of the Marsh , Ten Brothers , and adopted the Chinese national sport ping-pong as a theme to create a TV animation Ping-Pong Boy to enter the Chinese market. However, these ventures failed.

Why did Wang Film fail at that time? The Taiwanese animation industry structure gives

22 GopoMedia has created two software tools and three dynamical image databases. AniMaster Version 4.0 won the Excellent IT Application and Product Award: Best Tool Software in 2000. Animation Treasure Case won the 2003 Digital Content Award-Innovation Software Award and was voted one of the Best Teaching Software (Small Business Innovation Research 2007). Wang Film also had a joint venture with First International Computer (FIC) to set up AniTime Company to market its own Internet animation brand in 2000. AniTime Company also operates the digital visual images value-added business, Flash, 3D, 2D animation production, image design, multi-media plan and production, website design and website establishment. In 2D animation content development and products licensing part, AniTime created several canton celebrities such as cute nurse Miss Tow, Dr. How, Swordsman strange doctor, and visual characters in CTV Summer We Go and Eastern Broadband Telecom Web TV programs. AniTime also provides animation IMC service; its clients include McDonald’s CF, Apple Sidra’s CF, BMG singer’s MTV, Cosmosbank’s Internet animation, Taiwan Next Magazine’s dog, notable anchorwoman Amanda Lee’s cartoon character, Chinatrust bank and Taipei National Palace Museum’s e-learning course materials. Anitime also produces 3D animations such as Little Dinosaur, Fat Angel and Bug School , and animation SMS content for Personal Handy-phone System (PHS) and Asia Pacific Online (APOL) (Anitime 2007).

102 some indication. According to both George Chang (1999, 104) and James Wang (2004, 70), the Taiwanese TV animation market is too small to accommodate the domestic animation industry. In addition, competition among the numerous cable TV channels means most Taiwanese TV stations can only pay US $ 1,500 per episode, but the cost of one episode animation is over US $ 30,000. The profit margins are non-existent: the sales revenue of TV animation in Taiwan cannot cover the production costs. Because the value of the Taiwanese market is so small, Wang Film chose to work with foreign animation firms and TV stations to co-produce and broadcast TV animations through their distribution networks. Because of this, many foreign animation firms expressed an interest in cooperating with Wang Film (Chang 1999, 103-104).

In my interview with him, George Chang described the structural similarity between the Chinese and Taiwanese TV markets: The TV stations cannot pay high-prices to purchase animation. The income could not even cover the animation paper. Furthermore, the profit of animation industry is very small, thus most investors turn to TV dramas. Chinese TV dramas are faster to recoup costs and easier to develop related merchandising. Chang believes market demand is weak: if the demand for TV animation subsides even more, Wang Film might not consider producing original content. Wang Film’s foreign clients have also reduced their production cost by 40 percent over the total budget. Moreover, it is sometimes difficult to receive payments monthly; some clients are late in paying and request Wang Film to discount even more. In this situation, Taiwanese animation films have difficulty in raising capital to produce branded TV animation without government support. Even if Wang Film wants to cooperate with other firms to acquire shared copyright, it still needs sufficient capital.

However, Chinese Central Television (CCTV), one of the clients of Suzhou Wang Film, differs from other TV stations in China. Chinese Central Television (CCTV) is directly administered by the State Administration of Radio, Film and Television (SARFT). It is not only a major broadcast television network in China, but also a powerful propaganda media outlet in China. As I mentioned above, CCTV does not share animation copyright with production firms. It also benefits via program exchange with foreign TV stations and

103 license fees from publications (Jiang 2007).

When Suzhou Wang Film adapted its strategy to ‘make money’ from CCTV, it decided to cooperate with another animation firm, Hongyang. In George Chang’s opinion, Suzhou Wang Film and Hangyang are ‘sister companies’. They compete with each other but at the same time also share risks. George Chang told me: ‘The aim of Suzhou Wang Film is to improve human capital and cultivate experience. The middle-term aim of Suzhou Wang Film is to develop self-production films, derivative goods, brand, 3D films, and go public in the foreign stock market. The long-term goal of Suzhou Wang Film is to combine Taiwanese creativity, Hollywood marketing and the Chinese market and low cost’.

George Chang said that the Chinese government now nourishes the animation industry similar to how the Taiwanese government previously nourished the semiconductor industry. The creative industries are seen as environmentally friendly and they receive positive attention around the world. However, despite the advances made by Chinese animation firms like Sunchime and Great Dreams , Chang believes that the main competitors of Suzhou Wang Film in China are Taiwanese firms like Hongyang, CGCG, and Far Eastern Animation.

5.2 Artkey Art Licensing Center: Art Licensing in China

The second case study illustrates how intellectual property exploitation has emerged as a business model in the visual arts. Until recently, IP (including copyright, trademarks, patents, etc.) were not closely associated with the visual arts. The innovation in this case is that an entrepreneur has identified the opportunity of a vast heritage of artwork, and the fact that artists don’t really understand how to exploit their value. Previously, an artist would sell the work, and with it the ownership rights. Most artists did not realize they still owned the copyright.

The Taiwanese entrepreneur who has made this occur is Alex Guo (Guo Yicheng), the CEO of Artkey. Alex Guo is not the first person to realise how to use licensing of art in merchandising products. However, he is the first person to employ this concept in

104 pan-Chinese countries successfully. Guo was introduced to me by Professor Zhang Xiaoming who works in Chinese Academy of Social Sciences. Guo is tall and thin and indeed looks more like an artist than a businessman. In fact, he was previously a painter. His demeanor reflects elegance and education. This is also reflected in the tasteful décor of his offices. In talking with Alex Guo you can discover some clues to his idealism. However, this doesn’t mean he is not practical. Guo presents his arguments clearly in each sentence although his expression is quite leisurely. He is also adept at time management. During the interview, another project team was waiting for Guo to discuss some agendas. However, he was absorbed in my questions and answered them sincerely. He says: ‘Concentrate on one thing each time.’ I think this is one of his tips to achieve things efficiently.

Alex Guo talks at length about the company background. Artkey Art Licensing Centre, previously SohoArt, is now the largest Asian art licensing company. It was founded in 1997. It represents more than 700 artists and 60,000 art pieces across the Taiwan Straits, as well as over 10,000 masterpieces from Taipei’s National Palace Museum 23 , National Taiwan Museum of Fine Arts. Artkey has headquarters in Taipei, and offices in Delaware, Beijing, and Shanghai. It has over 30 agents in Europe, North America, and Asia that operate its art-licensing services.

Alex Guo says that the core competitiveness of Artkey is its exclusive licensing of artists’ works, its first-mover advantage, as well as professional management in art, financial, and legal affairs. The short-term goal of Artkey relies on making profits through extensive licensing of its many works. The medium-term objective is to become stock listed, while the long-term goal is to promote Eastern culture to the whole world. Those statements have close relationships with Artkey’s entrepreneurial strategies, which I will discuss in more detail later.

In 1996, Alex Guo proposed a slogan ‘Let Art Go Online’. He held an event ‘Referendum: Hundreds of Artworks’ in his art gallery, and then built a global art database which not only

23 The Taipei National Palace Museum inherited a huge collection of precious artefacts from the Qing court that span the course of Chinese history. These artefacts, a total over 650,000 in number, include bronzes, jades, porcelains, lacquer ware, curios, calligraphy, paintings, rare books, and documents.

105 was the first Chinese artists’ search website but also provided the introduction to, and classification of over 400 art-related websites (Lu 2005, 110). However, Guo realized the high click rate alone would not bring in the real revenue. Guo continued to absorb a variety of knowledge in order to solve management issues. He obtained a certificate in postgraduate credit course Department of Law at Tunghai University in Taiwan, a MBA from University of Southern Queensland in Australia, and another master’s degree in Cultural Industries from Peking University China (Lu 2005, 110-111). He discovered that the ancillary products of artworks could earn better money than the originals. Artkey changed its business model to emphasize business licensing, although its approach was different from another eminent Taiwanese art licensing firm Airiti whose clients were libraries and schools.

‘Painters usually just sell their originals, but still own the artworks’ copyright’, Guo told me. Chinese law protects the copyright of the works (e.g. artworks, books, movies, music etc.) from the time of its creation until 50 years after the author’s death. Within this period, copyright can be transferred, inherited, and employed as a business practice, including public display, rent, and duplication. After the copyright protection period, the artwork becomes a public property, and everyone can have free use (People’s Daily 2006, The key of elegant city life).

Alex Guo says that writers and singers have collection agencies to request remuneration when their creation is used, including record brands (EMI, Sony, etc.), publishing offices (Blackwell, Edward Elgar and so on), and other individual agencies. However, visual artists didn’t have this kind of professional organisation to help them. Artkey then saw the opportunity to assist artists to protect their IP. In addition, licensing firms like Artkey not only produce the products, but also enhance their brand through those added-value artworks (China Culture Daily 2005, Alex Guo, the CEO of Artkey: Let Asian Art License to the Whole World). Guo stressed Artkey does not attempt to influence the artistic creation. He says: “Artists are responsible to create the individual-characteristics of the artworks. Artkey explores the appropriate business combinations (China Culture Daily 2005, Alex Guo: Let Asian Art License to the Whole World).

106 Artkey has identified three difficulties that have hindered the distribution of artwork: These are restoration, access and intellectual property. First, Artkey employs HP Professional Color Proofread Management System to restore timeworn paintings to their original condition. Digitalization allows 99 percent authentic reproduction. To solve the second problem, Artkey has built a mature licensing artworks management system, which makes art duplicates easy to search and download worldwide.

When Artkey obtains a licensing contract, it will first build the artist’s digital file: this includes the artist’s history, awards, exhibition records, and artworks’ descriptions. Following this, Artkey will digitalize a high-resolution image (Lu 2005, 112). It classifies artworks by different topics: color, blood type, star signs, seasons, roles, and sets up over 200 keywords with each artwork (Lu 2005, 110). The third area, Art IP, will be discussed in detail later.

In the initial six years of the company, Artkey visited and negotiated licensing contacts with over 5,000 renowned artists listed in Fine Art Annual. In accordance with market requests and firms’ demand to design art products, the company provides a ‘licensing design guide’ to assist the firms to produce a sample product. Artkey acts as a consultant to assist the production firms to design and produce, it coordinates between artists and the producer, and it provides some assistance in marketing the products (Lu 2005, 125). In addition, Artkey employed anti-pirating laser labels to control the amount of products licensed, and to maintain quality control, storage, marketing and distribution, and even promoted the Infringement Act of IP (Lu 2005, 113). At the same time, Artkey also operated B2C (business to customers) relationships by which customers can order personalized licensing art products online. According to Ivan Fan, executive vice president of Artkey, the company invested heavily and did not break-even until 2003 (Lu 2005, 111).

After 2004, Artkey realized the storage of art goods was resulting in management pressure. Artkey decided to sell all stored merchandise to enterprises. Henceforward, Artkey put its all energy into art licensing. In addition, Artkey obtained the personal funds from two powerful

107 investors: Gao Shangzhi24 and Lin Jiahe25 (Lu 2005, 111). The most important strategy of Artkey, however, is art licensing. As mentioned above, Artkey obtains intellectual property rights (IPR) from artists; but importantly it then creates value-added goods and other digital content services. Artkey is not only the bridge between artists and industries, but also between western markets and Chinese art (see Figure 5.5 for some examples).

Figure 5.5: Left Picture is Qi Baishi’s Original Artwork. Right Picture is Its Value-added Product: Self-joyfulness-teapot Lidded with a Cup. Source: Artkey official website (2007). http://www.artkey.com/Web_artkeyII/LicensedProducts/ShowProIntro_c3490001210_01.asp

As a professional art licensing company, Artkey employs staff from art, law and business backgrounds. It also has many well-known art brands: Artkey‧Qi Baishi, Artkey‧Liu Guosong, Artkey‧Floral Fairies, Artkey‧Taiwan Classic, Artkey‧Archive Taipei National Palace, Artkey‧Oriental Beauty, Artkey‧Formosa Beauty26.

Strategy #1: Business Models

Artkey has utilized artworks in different business models since 2002. Principally, it comprises three businesses: product licensing, print licensing and digital licensing. Artkey’s product licensing program covers a wide range of industries, including stationery and paper

24 Gao Shangzhi is the vice-chairman of I-Mei Food Co. 25 Lin Jiahe is the chairman of Ambit Microsystems. 26 Furthermore, Artkey is the sole agency of a great deal of featured artists’ works: Wang Zhaoru, Shi Dan, Wu Zuoren, Wu Minrong, Xu Feng, Hung Juihsia, Wong Luisang, Shiy Dejinn, Wang Zhenhua, Ye Yuzhuong, Wu Yeizhao, Meng Qingnang, Lu Bisa, and Chang Chenwen. Artkey’s artworks range from watercolor painting, pastel painting, rubber color painting, ink painting, oil painting, calligraphy, mixed media, to other media. Artkey also provided wide subjects of artworks including abstract, animals, botanical, calligraphy, kids & fun, landscapes, people, sports, still life, zen, masters, and museum.

108 goods, housewares and home textiles, home décor and furnishings, apparel and accessories, toys and games, food and beverages, health and beauty products.

Product Licensing

Alex Guo says: ‘Artkey would acquire between 3~15 percent copyright royalty, after the production firms’ profits. Artkey acquires different commissions depending on products. For example, packaging design products are 3~5 percent, greeting cards are 15 percent, and pottery and porcelain are 10 percent. Artkey also shares the royalty with artists (cited in Hong Kong Kwong Wah Yit Poh 2005, Duplicate Beauty).

The artworks held on behalf of the artists have led to many creative ventures between Artkey and industries worldwide. For example, in August 2006 a leading corporation, the Enjoy International Development Corporation used the images Apricot Blossoms by Qi Baishi and Fine Horses by Wong Luisang to launch their name cardholder as a complimentary gift for enterprises. Artilize Worldwide, a leading home décor products manufacturer in Taiwan, has received high recognition in the US and European countries such as France, Belgium, Denmark, Netherlands, and Germany with the Tales by Pave - Floral, Songster, and Tenderness wall plaque collection licensed by Artkey (Artkey 2007, Successful case - Artilize Worldwide Co., Ltd.). One of the leading jigsaw puzzle manufactures, Wentworth, has launched a new series of wooden puzzles designed with Artkey’s artworks, such as Dark Mormon by Chen Kwodong in Europe market in July 2006.

IT products have also been the beneficiaries of Artkey’s artworks. Datastore Technology designed their Hi-Speed USB 2.0 slim enclosure with Artkey licensed artworks The Tang Style-XX by Ye Yuzhuong, Characters by Xu Feng, and the popular artwork, Working Hard by Wu Hsuehjang in July 2006 27 . Artkey has also licensed its images in the food packaging

27 Since 2005 the leading brand of Women’s accessories in Asia, IF, has launched the unique Eastern style designer leatherware with Artkey’s artworks. IF designers choose Wu Minrong’s Flowers and Moon, Wu Zuoren’s Cat and Butterfly , Chang Hsitsun’s Singing Birds in Spring , Wang Zhenhua’s Playing Polo , Wu Minrong’s Water Lilies and Flowers and Moon , and Cao Jingen’s Faces and Basked in the Sun , to produce women’s wallets and various leatherware. These products are not only popular in Taiwan and Hong Kong, but also in Japanese department stores such as Takashimaya, TOBU-Utsunomiya, Toyota- Matsuya, and Mitsukoshi.

109 market. Ten Ren promoted its tea gift box, which featured artwork 28 creating a surge in sales in 2005. The leading Asian food companies Ong Sieng and Isabelle also used Artkey’s artworks to improve moon cake packaging in 2005 and 2006 .

Print Licensing

A second area of Artkey’s activities is called Digitized Genuine Artwork. Artkey provides licensed customized art reproductions, either as framed works or wallpaper. Artkey also advises on artworks to fit clients’ themes, décor styles, or their CIS color systems. In Taipei International Airport, Artkey’s Digitized Genuine Artwork includes premium artwork reproductions from Taipei National Palace Museum.

One of the successful cases of Artkey’s print licensing business is Portal Publications, a member of the Devon Publishing Group, one of the world’s largest publishers of graphic art. Portal Publications introduced matted prints, posters from artists Wu Minrong and Yang Hsinhong through their worldwide channels (Artkey 2007, Successful case - Portal Publications). Since August 2005, the New York Graphic Society (NYGS) has introduced a floral series by Meng Qingnan, Chang Chenwen, and Wong Luisang into to the home decorative market 29 .

Digital Licensing

Artkey’s digital licensing model applies low-resolution art images mainly to technological products, such as the Internet, cellular phones, PDAs and computers. The art images can work as screen pictures, electronic greetings cards, wallpaper, screen savers and flash animation. One booming case of Artkey’s digital licensing business is Nokia V-Card. Nokia V-Card are enriched by Artkey collection, Cherries, Chicken and Chinese Cabbages , and Golden Boy , and mobile users download and send those animated greeting cards through V-Card website (Artkey 2007, Successful case - Nokia V-Card).

28 Cao J.’s Basking in the Winter Sun and Hug. 29 Artkey’s print licensing service was also presented at the popular restaurant, Kitchen 12 of the Sheraton Taipei Hotel. Kitchen 12 mixed the wallpapers/framed artworks of Artkey’s collections to create its elegant

110 In addition, Artkey has expanded its business into the publishing and framing industry. Artkey equips with prints, box frames, canvas, and wood mounting businesses to improve the quality of customers artworks. Artkey also provides a large variety of frames, which are of different styles such as simple, rococo, classical, modern etc for clients selected images.

Alex Guo believes ‘Artkey’s best strategy was to introduce the concept of art licensing.’ Artkey has assisted many artists in such specialized functions as financial, legal and other affairs. Some artists have received considerable benefits from art licensing. These artists will recommend other artists to contact Artkey. According to Guo, Artkey only signs exclusive contacts. In other words, the artists authorize rights exclusively to Artkey, who sub-licenses to manufacturers. At first, Artkey was only able to obtain single artworks, but in time the company was able to contract the entire works of some of its artists. However, each artwork needs an individual license (Lu 2005, 114). If one contracted artist’s artwork is not appreciated, Artkey can take the initiative to terminate the contract to let him, to try other possibilities.

Strategy #2: Acquiring Authorizations

Artkey’s strategy in China relies on acquiring licenses. At present, China represents a rich resource base rather than a market base. According to Alex Guo, the international art licensing market is more mature than in China, thus licensing companies receive more protection and benefits in the international market. Guo mentioned the existence of IP problems in China. For this reason, Artkey has tried to educate Chinese people about the concept of art licensing, and convince artists of the value of art licensing. Artkey joins different kinds of forums and events on the initiative. At present, however, Artkey is spending money and not earning significant profits in China. The core of the art licensing business is obtaining artworks. This is not always easy to do: many artists distrust the business world and even the Internet. Nevertheless, Artkey has obtained authorizations from many highly acclaimed Chinese artists including Qi Baishi, Wu Zuoren, Ye Yuzhuong, Chen Banshan, Luo Erchun, Tuo Musi, Yang Feiyu, and Liu Boshu. atmosphere in March 2005.

111 Artkey Qi Baishi is the most featured art brand and has been licensed to several well-known companies, such as Shin Kong Mitsukoshi, Carrefour, I-Mei Foods, Chunghwa Telecom, and Fubon Financial. The most successful case of Artkey Qi Baishi is Artkey Qi Baishi Chinese Reunion Dishes in which Artkey cooperated with the 7-11 chain stores in Taiwan in 2003.30

Figure 5.6: Cherries Created by Qi Baishi is the Biggest Business Volume Single Artwork in Artkey Source: Artkey official website (2007). http://www.artkey.com/Web_artkeyII/PicList/SearchPicByAny.asp?SubjectID_1=16

Irene Chen, a section manager in Artkey’s planning department suggests that the core value of art licensing is quality, not quantity. Artkey must choose the principal brands to promote. It is impossible to publicize all Artkey’s artists, because the resource and market acceptance is limited (Lu 2005, 122). Accordingly, Artkey chose Qi Baishi’s paintings as the lead brand. Alex Guo believes this is because Qi Baishi is one of few modern artists that the general public recognizes. In addition, Qi Baishi’s paintings, feature bright colours and are suitable for daily use articles. For instance, Figure 5.6 ‘Cherries’ created by Qi Baishi is the best sales artwork in Artkey.

Artkey struggled to obtain Qi Baishi’s rights for two years. Qi Baishi had already passed

30 The product was very successful, reaching a 300% pre-order growth rate. In addition, the business volume of signed artwork ‘Cherries’ in Artkey‧ Qi Baishi is over US$ 613000 dollars, 100 times higher than the price of the original (Artkey 2007, The Best Case of Art Licensing: Artkey‧ Qi Baishi).

112 away and his family structure crossed two generations and was divided between North and South China. Artkey helped the family to mount a Qi Baishi art exhibition and produce print albums. Artkey also continued to explain and communicate the profit system with these relatives. Finally, Qi Baishi’s relatives granted the rights to Artkey (Lu 2005, 112).

Besides obtaining authorizations from individual artists, Artkey also endeavours to acquire art licenses from artists within the Songzhuang district. Songzhuang is the biggest clusters of self-created artists in China. Over 700 artists live there. Originally, this cluster had assembled around the Yuanmingyuan on the northwest of Beijing, before transferring to this eastern suburb of Beijing after the artists were forced out. Artkey obtained exclusive contracts with many of Songzhuang’s painters through an organization called the Original Art Copyright Protection and Art Licensing Service. This co-operation also makes Songzhuang the first art licensing area in Asia. Artkey has also employed a specific strategy in China to exploit the 2008 Beijing Olympic Games, and in this way has collected more authorizations related to this valuable topic. Artkey has cooperated with the national-level unit Humanistic Olympic Studies Center Renmin University of China (HOSC) 31 to plan a series of art activities for 2008 Humanistic Cultural Olympics Games.

Artkey has solicited and hosted the Humanistic Olympics Art Exhibition for three years. The aim of Humanistic Olympics Art Exhibition is assist artworks to become more visible in the community and to commercialize artworks. The theme of 2nd Humanistic Olympic Art Exhibition- Tian Yun centered on the Palace Museums of Beijing and Taipei. It was held in conjunction with the 2005 International Conference for the Beijing 2008 Olympic Games rd and the International Creative Industries Conference on 26 June 2005 in Beijing. The 3 Humanistic Olympic Art Exhibition displayed national 150 artworks from Central Academy of Fine Arts, Academy of Arts and Designs, Tsinghua University, and Hubei Institute of Fine th Arts, inaugurated in Beijing since Sep. 2006. The 4 Humanistic Olympic Art Exhibition, the most attractive and largest one, has collected worldwide artworks with the Olympic spirit

31 The Humanistic Olympic Studies Center was formed in October 2000. Its aim is to improve, strengthen and coordinate academic efforts in preparation for the Beijing 2008 Olympic Games under the central theme of Humanistic Olympics. HOSC operates as an independent research center under the supervision of Renmin

113 and was held in Beijing and Shanghai, starting from June 2007.

Because Artkey serves as the executive unit of the Humanistic Olympic Art Exhibitions, it set up an institution, Future Art Gallery, as a cultural intermediary to cooperate with scholars, students, artists, art criticizers, art collectors, and media to promote Asian art. As I discussed above, the Future Art Gallery has allied with art Institutes and other artistic organizations to create a series of topical artworks with the theme of 2008 Beijing Olympic Games: one world, one dream. All selected artworks will be published with an electronic album of paintings and all winners will receive an attendee certificate of The Humanistic Olympic Art Exhibition. The authors of these brilliant artworks also have the right to sign a license contract with Artkey. Future Art Gallery also provides an international promotion service to assist members to exhibit artworks and develop related productions in New York, London, Hong Kong, Taiwan, Beijing, and Shanghai. Furthermore, Future Art Gallery also provides artworks online display (Future Art Gallery 2007). Future Art Gallery has held an Academic Art Masters Exhibition to display the works of Zhou Xianglin (the vice-dean of Hubei Institute of Fine Arts), Pang Maokun (the chairman of Oil Painting Department in Sichuan Fine Arts Institute), An X (the chairman of Oil Painting Department in China), Pan Xiaodong (Academy of Fine Arts), and Qi Haiping (associate Professor in Tianjin Academy of Fine Arts).

Combining with Humanistic Olympic Studies Center Renmin University of China (HOSC), Artkey plans to produce those artworks as memorial images and products in the 2008 Beijing Olympic Games and to represent the spirit of the Cultural Olympics. In this special project, Artkey is in charge of manufacturers’ selection and management. The company is also responsible for seeking sponsors when Artkey hosts exhibitions or other events.

Although Artkey has tried to accumulate artists’ rights and artworks in China, in vice-CEO of Artkey Fan Zifan’s opinion (cited in Lu 2005, 114), the number of Chinese artists is sizable, and many now want to increase their income through art licensing. Thus, it is not

University (RUC).

114 difficult to find out artists or artworks, but it is difficult to choose the artists with high market potential.

Strategy #3: Products Marketing

One of Artkey’s advantages is international points of sale. Another key strategy is hosting and participating in exhibitions. The benefit of those exhibitions is to access the potential clients, and catch the media’s attention.

Alex Guo says that when he was president of a students’ union during his university period, he specialized in exhibitions. He believes general artistic exhibitions can be divided into three species. The first is pure art: that is, art appreciation is the core. The second is pure commerce, which mainly relies on selling pictures and artistic products. The third is the cultural creative industry style that Artkey generally adopts. At first, exhibitions with cultural creative industry style create a kind of artistic feeling, and then influence purchases unobtrusively and imperceptibly. For example, Artkey set up an experience area in exhibitions to display how artistic goods apply to daily life. This is an efficient way to reach the sales target.

Alex Guo estimates that the whole art license market is potentially $ US 60 billion and the Chinese market $ US 4.9 billion per year. Artkey is still assessing the potential of the Chinese market at present. In the initial stage, Artkey has emphasised stationery, duplicating pictures, and frame businesses. However, when Artkey signs a contract with foreign firms, it usually needs to spend 2~3 years in product planning, and profits and results take time to appear. In order to maintain the sustainability of the company, Artkey believes the foreign market will be the priority strategy in the future (Lu 2005, 125). Guo says: ‘the main income of the company still comes from U.S.A., Europe and Taiwan with the approximate percentage 35: 35: 30’. For this reason, Artkey has set up an office in New York for the American copyright trade, but there are currently only 3 members of staff in this office. In European market, Artkey allows clients to select paintings through the Internet directly, and then Taipei Artkey’s staff follows up contact with those potential clients. Artkey’s

115 customers mainly are authorized departments, authorized agents, and some manufacturers.

Artkey also participates in major international exhibitions, such as those hosted by the Licensing Industry Merchandisers’ Association (LIMA). LIMA, founded in 1985, is the most influential worldwide trade organization in licensing industry. In 2001, Artkey became the first Asian licensing organization to attend the New York Annual Licensing International Show hosted by LIMA and received a tremendous response from exhibition attendees. At present, Artkey assists Taiwanese and Chinese governments to participate in the New York Annual Licensing International Show.

In 2004, Artkey participated in the Taiwan Image Hall in the 900-square metre New York Annual Licensing International Show. Taiwan Image Hall had two topics: Artkey ‧Archive Taipei National Palace Museum, and Artkey ‧Classical Taiwan. It attracted attention and established cooperation with well-known firms, including Swatch and Givenchy (Lu 2005, 121). In 2005, Artkey hosted the first Asian Licensing National Image Hall which was conducted for the Taiwanese government and 12 private organizations. It was named Art in Taiwan. The Taiwan Hall: Art in Taiwan had six booths with over 10,000 pieces of Taiwanese artworks, and was separated into three brands: Archive Taipei National Palace Museum, Classic Taiwan, and Modern Taiwan 32 .

Artkey won the honor of being the first and only Chinese brand Nominee in the 22nd International Licensing Excellence Awards and being the co-organizer for Taiwan Pavilion in 2006 New York Annual Licensing International Show. Artkey was also the first Asian art licensing enterprise that consecutively participated in International Art Expos held across the Taiwan Strait in November 2001.Within that month, Artkey gained many business opportunities by participating in these two international shows in Shanghai and Taipei (Ministry of Economic Affairs Digital Content Industry Office 2005-2006).

Artkey not only has an honors list in international exhibitions, but is also hardworking and

32 Artkey acquired two significant contacts, namely Plus License and MMI. Taiwan Hall: Art in Taiwan created $US1.5 million dollars business volume at this show (Artkey 2007).

116 energetic in China. Artkey hosted Meet 2010 – Artkey Art Licensing Digital Life Exhibition that opened in April 2006 at the Shanghai Creative Window centre. Artkey provided a performance where all the models presented Artkey’s reproductions and products designed with Artkey’s licensed artworks. After this exhibition, Artkey attracted interest from the Secretary of Shanghai Municipal Committee of CCP who participated in this exhibition. Shanghai Luwan District Committee of Science & Technology contacted Artkey promptly. Luwan District Committee offered a free showroom to Artkey, named Shanghai Flagship Showroom of Artkey Art Licensing Center in Hong Kong New World Plaza, and provided all expenses for decoration 33 . In the same year, Artkey also cooperated with Chaoyang Creativity Development Center to open Artkey’s Creative Exhibition: Chaoyang 706 Creativity Factory & Future Art Gallery in Beijing 798 Art District 34 from 24 September tol the end of October 2006.

Artkey was also invited to exhibit at The 2006 Shanghai International Licensing Show, jointly sponsored by LIMA and the Shanghai Trade Exhibition Office held in Shanghai Exhibition Center from 17 to 19 November, and 1st Chinese International Animation Image and Licensing Products Exhibition, the first professional licensing exhibition in China, was held on 31 March 2004 in Shanghai International Convention Centre. Guo was also invited as a keynote speaker on the topic The Trend and Business Opportunity in Brand Licensing, Art Licensing and Sport Licensing Industries. Artkey presented at the 2005 HK Licensing Show from 5 to 7 July. Guo was invited to deliver a speech introducing the concept and successful practices of art licensing in the conference and he also delivered a speech The 3rd Asia Cultural Co-operation Forum was held in Hong Kong from 9 to 12 November 2005.

Strategy #4: Internet and Art Licensing Industry

Strategies combined with the Internet are one of Artkey’s focal points. Alex Guo (2007) mentioned that is because of his age. When Guo set up SohoArt, the predecessor of Artkey

33 This showroom offers the general public an opportunity to experience creative Eastern art from 10:00 to 18:00 daily. 34 Beijing 798 Art District, designed by the East German architect in the 1950s and praised as an example of classic Bauhaus architecture, has been an essential international artistic landmark.

117 in 1996, he had just graduated from university. At the time, the Internet was in its ascendency.

As I discussed above, since April 2006 Artkey’s art images have been be used as LCD-TFT screensavers, and with mobile phone downloads services such as phone-to-phone animation service (V-card). The leading mobile phone company Nokia has chosen Artkey to develop a new series of Asian art V-card downloads. Qi Baishi’s Cherries, Gourd, Apricot Blossoms and other Qi’s artworks can be downloaded from Nokia’s V-card downloads center. Artkey also provided color images for mobile phone download services for other telecom companies such as SMS Sohu, Chunghwa Telecom, Taiwan Mobile, SmarTone, Far Eastone, and First International Telecom (FITEL). According to Guo (2007), at present, Artkey’s cell-phone screen images service is mainly for publicity.

Artkey and Beon Media (www.beonmedia.com ) co-launched the first Chinese art digital gallery, GalleryPlayer, a digital home gallery service that delivers high-resolution artworks to any Microsoft Media Center Edition PC, in January 2005. Artkey also built cooperation with Corbis, an image-licensing firm set up by Microsoft in 2005 (Lu 2005, 119). At end of 2004, Artkey authorized Qi Baishi, Wu Zuoren’s artworks to 163bar.com to commence the customized enterprise E-card service to integrate enterprise’s logo, CI and color to be the components of unique and exquisite greeting cards. Furthermore, Artkey initiated a program Sending out Care and Love by Fine Art e-Card to express the love to sufferers of the 2004 devastating tsunami by free-licensing artworks to 163bar.com E-Card Center in February 2005. The United Nations Children’s Fund (UNICEF) also released a new series of season’s greeting cards with Artkey’s artworks before the New Year; all sales income went to impoverished and unfortunate children all over the world.

Artkey has established a brand of e-business, 1dd, to market professional art décor products such as Qi Baishi art brand merchandise. In addition, Taipei National Palace Museum licensed products in 2006. The visual art décor shops 1dd.com.cn has been launched on Chinese well-known electronic business platform Taobao.com, and Dangdang.com. Artkey has provided digital photomontage service to allow clients to easily comprehend the

118 application and has launched the Artkey monthly e-paper to introduce international promotions, popular products, marketing events, and exhibitions.

5.3 Conclusion

In this chapter, I start to discuss the second research question How Taiwanese digital content firms have adopted strategies in the Chinese market? via examining the strategies of two off-line digital content companies: Wang Film and Artkey. I have shown the different approaches these companies take. Their products are generally produced in traditional analogue formats. In the case of Wang Film, the company gradually developed from fee-for-service work (fabrication) towards original content and finally outsourcing to Mainland China. In the case of Artkey, it adopted different kinds of art licensing methods as business models. It employs the concept of IP as a bridge between artists and industries, and also Asian and Western countries.

Wang Film has used four strategies in China: First, Suzhou Wang Film partnered with Huqiu Technical Art School. Second, Suzhou Wang Film set up a flexible employee system of ‘animation satellite factories’ to build an efficient and cost-effective entrepreneurial environment. Third, Suzhou Wang Film built a long-term partnership with China Central Television (CCTV). Fourth, Suzhou Wang Film launched a self-produced movie for cinemas, Fire Ball leaded by Taipei Wang Film.

The evolution of Suzhou Wang Films’ strategies can be divided into two stages, as Figure 5.7. The first stage is the labor-based stage, in which Wang Film focused on seeking cheap and good quality employees in China from 1997 to 2002. The second stage has been market expansion from 2002 until now. In this stage, Wang Film built the partnership with CCTV. Most entrepreneurial strategies of Suzhou Wang Film are long-term strategies. The film release completed the life circle.

119

Decline Stage Self-production film Fire Ball

Maturity Stage

Growth Stage Animation Satellite Factories

Partnership with CCTV Introduction Stage Partner with Huqiu

1995 2000 2005

Figure 5.7: The Evolution of Suzhou Wang Films’ Strategies Source: Researcher Compiled for This Study

I have identified five strategies of Artkey in China: First, the most successful strategy in Artkey is licensing. Artkey obtains intellectual property rights (IPR) from artists, and then focuses on creating value added goods and other digital content services. It comprises three businesses: production licensing, print licensing, and digital licensing. Second, Artkey relies

on acquiring licenses in China; the most successful cases are Artkey ‧ Qi Baishi and

Songzhuang Artistse. Third, Artkey employs a specific strategy to take advantage of the 2008 Beijing Olympic Games, and also collects more authorizations from this valuable event. Fourth, Artkey hosts and participates in international exhibitions; the most momentous exhibitions Artkey participates in are those hosted by Licensing Industry Merchandisers’ Association (LIMA). Fifth, strategies in combination with the Internet have become one of Artkey’s focal points.

The evolution of Artkey’s strategies can be divided into three stages, as shown in Figure 5.8. The first stage is art license acquisition and promotion (from 2000 until now). The second stage is the market expansion stage (from 2001 until now). In this stage, Artkey participates in international art exhibitions and uses the Internet to secure potential markets. The third stage is an event-based stage (from 2005 to 2008) that focuses on the Beijing Olympic

120 Games. Most entrepreneurial strategies of Artkey are long-term. Participating in art exhibitions and combining with the Internet demonstrates a transfer of process experience from Taiwan. These strategies are at an early stage of growth stage in China.

Decline Stage

Maturity Stage

Growth Stage Participate in Art exhibition, Combination with Internet Beijing Olympic Games Introduction Stage

Art licensing itself, Acquire licenses in China

1995 2000 2005 Figure 5.8: The Evolution of Artkey’ Entrepreneurial Strategies in China Source: Researcher Compiled for This Study

121 Chapter 6

This chapter examines Taiwanese DCI firms whose operations are predominantly web-based. I will examine the history and evolution of three companies: they are CnYES, Somode, and iPartment. The first, CnYES uses Internet as a business channel; the second, Somode employs creative format and content design while still concentrating on traditional media content; and the third, iPartment exploits Web 2.0 and avatars.

The examples in this chapter illustrate cost-reduction and market penetration strategies. Another reason for choosing these three case studies is that they illustrate the various profits resources of online digital content industries, namely Internet advertisements, E-Commerce (EC), member subscriptions or other payments from end users, and content licensing.

6.1 CnYES: Taiwanese Financial News Website in China

The first case study is of an entrepreneur who has identified opportunities in particular target audiences. Bob Deyou (Deyou Hongzhi) is the president and CEO of CnYES. I had the chance to make contact through his uncle, Zheng Zhen-Ming, a notable Taiwanese scholar in the field of mass communication. Before I met with Deyou, I had made contact with employees of his company in the Shanghai branch. According to his employees, Deyou is the chief decision maker. From these descriptions I had imagined Deyou to be a forthright and strong-minded individual but to my surprise he presents as a fashionable and idealistic person. His start-up firm is his dream and he points out, one not driven purely by profit. However, he truly illustrates the characteristics of an entrepreneur, organizing resources from investors and partners.

CnYES is a leading online financial brand in Taiwan. It provides financial investment information and services. At present CnYES provides Taiwan-share, Hong Kong-share, NYSE (New York Stock Exchange), and Shanghai-Shenzhen share and foreign exchange information. CnYES also provides professional research reports from Forex.Com, Polaris MF Global Futures and Yuanta Futures.

122 Most credible financial information is provided in English and for this reason Deyou, decided to start up CnYES to provide popular Chinese financial knowledge to the Greater Chinese market. Deyou uses the expression, ‘Intellectuals should aim towards the future, be firm, and take heavy responsibilities’ to express his determination and the fact that he wants to compete with other financial media in Pan-Chinese areas.

Deyou believes the Internet is the best choice for financial media. The Internet can provide information with the following features: real time, unlimited, interactive, and multi-analysis. In the initial stage, CnYES established a parent company in the Cayman Islands and set up subsidiaries in Taipei, Shanghai and Hong Kong in May 2000 35 . At that time, the chief managers and one-third of the employees came from Central News Agency, the only international news agency in Taiwan. Deyou (Business Next 2001) stated that the competitive advantage of CnYES is its outstanding human resources. Most of CnYES’s staff has between five and ten years’ finance-related experience.

CnYES also provides professional information from international news agencies and media, for instance, Bloomberg , Reuters , Xinhua , The Wall Street Journal , and The New York Times . According to Deyou, CnYES pays US$ 31,000 per month to purchase these global databases. At present, two-third of CnYES’s news is self-produced and one-third comes from other media outlets. Deyou mentioned that CnYES’s news department includes journalists 36 , editors and translators from Taipei and Shanghai.

Deyou says, ‘CnYES is a digital content provider (DCP), instead of Internet content provider (ICP)’ (Cui 2007). CnYES provides thousands of financial quotations, databases, IT modules, and professional stock and financial news to other related websites, such as securities firms, investment credit firms, futures firms, banks, industries, associations. In addition, CnYES provides value-added services, such as mobile phone, PDA, messenger call, and out-bound interactive voice response (IVR). CnYES has ten professional studios to provide the services, including radio program production and multimedia databases.

35 CnYES obtained the funds from UMC, Nien Hsing Textile Co., Ltd., President Chain Store, CMC Magnetics, Mega Securities, and FTP (Business Weekly 2000, 96). 36 Only Taipei CnYES could have journalists.

123 Shanghai CnYES mainly transfers the experience from Taipei CnYES. At present, Shanghai CnYES operates two different websites: Shanghai CnYES and Tai-son.Com. Hong Kong CnYES has been closed down because the operation costs were too high. According to Deyou, Shanghai is the most significant financial city in China, and for this reason CnYES chose Shanghai to establish its first branch. Over 90 percent of Chinese stock exchange centres are concentrated in Shanghai and Shenzhen. In addition, there are a large number of Taiwanese firms and the best public security in Shanghai.

Strategy #1: From Digital Content Provider to E-Commerce Service Provider

Bob Deyou (cited in Wu 2007) divides CnYES’s operations into two growth stages. The first stage from 2000 to 2006 focused on original business information. CnYES set up four centres: the news centre, finance management centre, stock market centre and finance centre. According to Deyou, CnYES provides real time financial news 24 hours per day, including news of 800 Shanghai-Shenzhen-shares, 400 Hong Kong-shares and hundreds of international stock market news. Deyou realized ‘The most profitable way is to integrate the Internet service with the real world’ (cited in Wu 2007). For example, in 2005, CnYES collaborated with Sounder Technology to introduce Master of Stock Market decision software that has a real time stock index, historic analysis of single stock, and many other advantages 37 .

The second stage of CnYES from 2007 emphasized global investment. CnYES transferred from media-based to business channel-based. Deyou says that CnYES will introduce more services in the off-line world, such as investment lectures and clubs (cited in Wu 2007). For example, CnYES established the CnYES Wealth Management Club in June 2007 .The main service of the CnYES Wealth Management Club is to build guanxi networks among members and provide financial management, investment courses and study groups. The club also provides unique investment channels and collective negotiation, and E-learning centres.

37 Linear techniques include Relative Strength Index (RSI), Stochastic Oscillator (KD), Moving Averages Convergence and Divergence (MACD)

124 Shanghai CnYES provides original global professional financial news to attract financial investors to place advertisements and E-Commerce business, such as online investment and online consultation. Most Taiwanese news websites and blogs are blocked by the Chinese government. Shanghai CnYES is the only Taiwanese news website in China. Although it cannot provide substantial political news, CnYES allows Taiwanese firms located in Mainland China, and Chinese who are interested in Taiwan, to obtain lifestyle and financial news.

Bob Deyou has been quoted as saying: ‘In the initial stages, Shanghai CnYES was a content production centre, responsible for transferring and editing international news, and was dependent on a few Taiwanese managers who brought in know-how about content production’ (cited in Cui 2007). Deyou described a failed step by the company in the beginning. At first, he thought the ample capital of Shanghai CnYES provided a strong advantage in entering Chinese market. However, Shanghai CnYES faced a shortage of human resources and inadequate Internet infrastructure. At that time few of the staff recruited were creative and had the executive capacity to complete a project. Although Deyou proposed the concept of Web 2.0 a few years ago, it could not be implemented at the time. A key-contributing factor to the failure was inadequate attention to the Shanghai market: at that time CnYES put its focus on its Taipei branch. Taipei CnYES was influential in Taiwan for a long time.

Shanghai CnYES looks for strategic alliances with Chinese media and other financial investment firms. The company has established partnerships with many well-known companies 38 . CnYES and other two top financial websites in Greater China built strategic alliances in March 2001: Chinese ChinaWeb Ltd and Hong Kong’s E-finet.com. ChinaWeb Ltd owns two financial websites (www.chinaweb.com and www. homeway.com.cn), two magazines (Capital Week and Caijing Magazine ), and the newspaper (China Business Post ) (cited in EMKT 2001). E-finet.com publishes the sole financial evening newspaper Finet

38 Shanghai CnYES’s partners include Xinhua PR Newswire, Taiwan Chamber of Commerce, TVBS, Bloomberg, ET today, Finet, Yam, PC home, Msn, Finance Sina, Sohu, Taipei Computer Association (TCA), Homeway, Forex news, GCICT, Forex.com.cn, China Forex Online, Fxabc.com, Forexstar, NBD, Economy, Xincaijing, Bfic, and TEEMA.

125 Sudi in Hong Kong to develop its cross-media strength. This alliance has integrated their news, content, and even online advertisements. Deyou (cited in EMKT 2001) mentioned this as a win-win cooperation model, integrating resources across Greater China and enhancing Chinese financial information and the company’s competitive ability.

Bob Deyou realized Shanghai CnYES could not make much profit from advertisements, and he subsequently tried different innovations. Experiments relating to new innovations in digital content have been trialed, such as E-Direct Marketing (E-DM), print on demand (POD), voice over IP (VoIP), database marketing and blogs. However, the core business still focuses on the financial field. Deyou realized from prior experience that CnYES’s users just wanted to know how to make money. If the innovations did not focus on financial issues, they almost always failed (cited in Wu 2007).

In Bob Deyou’s opinion, the Internet is not also an information channel, but an interactive services channel 39 . Shanghai CnYES obtains profits from advertising and its content licensing service. In business channel services, CnYES acquires commissions from other industries. Therefore, Shanghai CnYES has two key functions: one is to provide information on investment; the other is as an investment service centre. Shanghai CnYES provides an e-learning FX Power Trading Course hosted by FXCM, one of the biggest professional retail foreign exchange firms in the world. This course includes basic foreign exchange analysis, IntelliChart software and an Internet forum. Long-term sponsors of Shanghai CnYES are E*Trade, President Futures Corp., Fuhwa Securities, Jihsun Securities, CIGNA International and Club-Med. At present, its competitors are Sina Financial Channel, Hexun.com and JRJ.com. Deyou says, ‘We put a heavy emphasis on Chinese market at present, especially because the Chinese government will probably regulate overseas investments in the near future’ (cited in Wu 2007).

39 Shanghai CnYES has become the platform of E-Commerce, such as American Depositary Receipt (ADR) investment, Power E*Trade MarketTrader online order system and other online investment tools.

126 Strategy #2: Extend New Product Line Tai-Son.Com

Bob Deyou realized Mainland Chinese and Taiwanese people both have demands to know what is happening in both China and Taiwan. Tai-son.Com has a different strategy than CnYES and Shanghi CnYES. Eighty percent of the content of Tai-son.Com is lifestyle information; just 20 percent is financial information. Deyou believes that Tai-son.Com has enormous potential and can become Taiwanese firms’ portal website in China. At present, Tai-son.Com is seen as a level 2 website while Shanghai CnYES is seen as level 3 website by Deyou. Although there are almost one million Taiwanese working in China, finding the right business contacts is still not easy considering the vast landmass of China.Tai-son.Com has been leveraged as a platform for the Taiwanese community to attract high-price advertisers such as car industries and real estate. In addition, it is considering forming business guilds and other social organizations, such as women’s associations, around the website.

The mission of Tai-son.Com is to become an effective platform to promote communication between Taiwanese firms. As I mentioned above, Tai-son.Com mainly provides lifestyle information. It established a blog to allow Taiwanese businessmen to express their feelings and experiences. Tai-son.Com also provides a free Yellow Pages services. It also provides an area to allow Taiwanese firms to publicize their PR events and classified advertisements. In addition, Tai-son.com plans to imitate Yahoo Knowledge Plus to provide the ‘Taiwanese firms’ knowledge database’ an all-inclusive database about Taiwanese firms in China.

Tai-son .Com has set up bridges and channels between Taiwan and China. Once, a Taiwanese entrepreneur needed a piece of land in northern Jiangsu, Bonny Hu, the Shanghai’s president of CnYES helped him to consult with officials and gained the land. Tai-son.Com also hosts symposiums, which assist Taiwanese firms to invest in factories, real estate or education in China. Taiwanese companies considering bank loans in China will often go to Tai-son.com first to solicit advice.

Shanghai CnYES employs Tai-son.Com as an agent to arrange education for Taiwanese

127 children in Shanghai. Tai-son.Com has cultivated good relations with educational institutions and has acted as the middleman for some of the major senior high schools and universities, such as Fudan University, Shanghai Jiaotong University, East China Normal University, Shanghai University of Finance and Economics, Shanghai Institute of Film Art, and Shanghai International Studies University.

Strategy #3: Synergy Strategy

The third strategy of Shanghai CnYES is to integrate resources with Taipei CnYES to promote synergy. CnYES employs different strategies on each of its websites depending on different locations. The target audience of CnYES is Taiwanese investors. Shanghai CnYES targets Mainland Chinese investors while the target audience of Tai-son is Taiwanese firms crossing between China and Taiwan.

These three websites share content with each other. All websites provide Pan-Chinese financial magazines, including Taiwanese Global Views Magazine , Marbo Weekly , Smart, Money , Business Weekly , and Chinese financial magazines Sales and Management , China Internet Weekly , New Finance Economics , New Marketing , and China Marketing . CnYES has also cooperated with Wisers Information Limited to launch a China, Taiwan, and Hong Kong Financial Newspaper Database.

CnYES established a financial blog service in June 2007, named CnYES Blog New World. Guest bloggers are not only well known in the financial field, but also have strong experiences and insights into the Greater China market. These include the CEO of Wealth Magazine Xie Jinhe, the CEO of FXCM Asia Li Jigang, the president of Capital Investment Trust Corporation Zhou Kangji, and the president of Centre of Wealth Management, SG Private Banking China Wang Taibei.

Shanghai CnYES uses financial software developed in Taipei CnYES. The research and development centre in Taipei CnYES has developed a lot of successful software, which is tested in Taiwan first, and transplanted to Shanghai later. Many Taiwanese security and

128 investment firms have employed the original financial software MoneyYES whose inventor is CnYES vice president Chang Jiajia. Chang says that MoneyYES analyzes each stock’s history, internal and external environments, including management, profit, growth abilities and credit standing. It can assist financial specialists to make decisions correctly. Shanghai CnYES has modified the MoneyYES decision system to accommodate the Chinese A-share market (Chang, cited in Wu 2007).

Chang Jiajia released the software program Digital Fenshen in September 2007. He believes the main benefit of Digital Fenshen is to assist financial specialists to start up business in association with CnYES, such as e-commence. In addition, they can service clients 24/7. Digital Fenshen 40 coordinated with CnYES’s classification system to divide financial specialists into different industries, such as Insurance Digital Fenshen , Taiwan-share Digital Fenshen , and US-share Digital Fenshen (cited in Wu 2007).

These websites share strategic alliances with each other. As I mentioned before, Taipei CnYES is in charge of international strategic alliances. Taipei CnYES cooperates with well-known foreign exchange companies FXCM, and one of the three biggest stock exchange firms E *TRADE. When Chinese government deregulates foreign exchange, Shanghai CnYES will be able to enter the Chinese market quickly because of its international partners.

CnYES’s websites exchange target audiences. Taipei CnYES has organized the China Development Zone Investment Business Tour to lead Taiwanese firms to invest in Chinese real estate or set up branches. Those services are usually followed up by Shanghai CnYES. For example, Shanghai CnYES introduced Taiwanese investors to visit the Dalian and Jilin provinces in the Northeast area in October 2004.

If CnYES wants to establish another branch in China in the future, Bob Deyou’s choice is Beijing. Many head offices of state-run enterprises, foreign enterprises, and banks are in Beijing. This is a very important factor for financial websites. In addition, travel from

40 Fenshen literally means a copy of one person who has the same personality and abilties.

129 Shanghai to Beijing is quite convenient via the high-speed maglev train.

6.2 Somode: E-magazine Content Provider in China

The second case study is an example of a professional digital content provider that employs free, high-quality, and interactive content to attract million of readers and advertisers. It generates significant profits in the Chinese e-magazine industry. Until recently, e-magazines were regarded as ‘marginal media’. The innovation in this case is that an entrepreneur has concentrated on the new format of e-magazines, and identified an opportunity. The entrepreneur who has made this occur is Cheng Yiwei from Taiwan, president of Somode. Cheng has combined product innovation and value innovation to create two of the most popular e-magazines in China. The company headquarters of Somode is located in Beijing. After some discussion Cheng suggested we meet in Taipei during Chinese New Year.

During our discussion Cheng Yiwei provided the historical background to his company. A firm called Fashionow was established in Taiwan in 1997. It then launched a free P2P MP3 platform Kuro on 11 July 2000. Chen Guohua, its chairman, had a vision of a pan-China market, including Mainland China, Hong Kong, Taiwan, and Singapore. China occupies the leading position in this vision. Chen raised $US 6 million to enter the Chinese market, based on a family firm model in 2000. Following this, the company Beijing Fashionow was established on 16 September 2000.

According to Cheng Yiwei, the move to Beijing in 2004 was Chen’s decision. He gave the following reasons. First, the Taiwanese market was small, and the expected value of the Chinese market is relatively high. Second, Chinese creative human resources lagged behind Taiwan; Chen sent 30 Taiwanese elites to Beijing to undergo three-months of intensive job training in December 2003. Third, Chen was afraid of being pirated by other Chinese firms, therefore Somode decided to operate this new format of e-magazine independently. Because Beijing is close to the political centre, Chen chose Beijing as the Chinese headquarters of Fashionow. At present, Somode also has a small office in Shanghai, just three or four staff that operates the advertising sales.

130 In order to improve Kuro ’s membership service, Fashionow released the first Pan-Chinese interactive digital magazine Cool Music Journal in July 2002. Next, Fashionow moved the whole e-magazine department from Taiwan to Beijing, and trialled Me Beauty , Wo Style , Woman Friend-Making Diary , D@sh Animation Diary , and Star, Good Mood in July 2004. D@sh Animation Diary and Star, Good Mood are reedited content from Taiwan. In December 2004, Wo Style and Woman Friend-Making Diary combined. In May 2006, Fashionow built a new brand with its e-magazine department, named Somode, while changing its domain name to www.somode.com. Following this, two new e-magazines were released: Go! New Power on 15 May 2006 and LaVie, Self-Entertainment on June 1, 2006. At present, Somode owns four e-magazines: Me Beauty (Me ai meili) , Wo Style (Wo nanren zhi), Go! New Power (Go! xin shili) , and LaVie Self-Entertainment (LaVie zi you shi). Me Beauty and Wo Style , fortnightly publications, are two of most popular e-magazines in China. According to iresearch (2007), the circulation of Me Beauty and Wo Style both exceeded 3 million per issue.

The content of Me Beauty includes information and skills about make up, keeping fit, modeling, fashion, and girls’ youthfulness and beauty. Me Beauty focuses on 15~22 years old females. Wo Style comprises variety of themes, such as Wo girl , theme games, stylish men, and sexual Q&A. In August 2005, Somode tried to charge readers of Me Beauty and Wo Style 2 RMB per volume, similar to the price of a ring tone download service. However, this model failed. Me Beauty , and Wo Style are still free to order and download (Chen 2006, 22; Ma 2006, 32).

Somode distributes these e-magazines not only via influential professional e-magazine platforms, such as Xplus and ZCOM, but also via its own distribution platform. Somode also cooperates with Chinese portal websites (Sina, Baidu, 1001m, Teein, 265), professional fashion websites (Fadmy, Trends), download websites (DBar, PPGou), Internet TV (PPStream), and other kinds of websites (iMook, KoooK) to supply digital its interactive media services.

131 Strategy #1: Creative Format of E-magazine

The primary strategy of Somode is its format. Somode’s e-magazines converge interactive materials, including voice, music, video, and games to enrich every topic. Audience participation has become a real thing, not just a ‘slogan’. The audience can read, listen or play Somode’s e-magazines totally on demand.

Cheng Yiwei believes Somode currently does not have any real competitors. Other print magazines such as Vogue and Elle just provide content to platform service providers to edit into e-magazines. This kind of e-magazine just could just be regarded as an incomplete e-magazine. The interviews in Somode are in the format of an e-magazine, a so-called ‘three-dimensional interview’. However, Cheng believes that with 7 million readers the magazine still has a lot of space to grow, taking into account that there were 210 million Chinese netizens in 2007.

Cool Music Journal was released in July 2002 and is the earliest interactive magazine in China. At that time, Chen also set up the pattern of Chinese e-magazine industry with two systems: content providers, and platform service providers (Chen 2006). The concept of employing flash format to produce an e-magazine was proposed in a meeting at Mount Yangming presided over by Chen Guohua’s younger brother Chen Guoxiong in July 2002. Kuro , the foremost product of Fashionow, was steady at that time, and Fashionow was eager to create a second stream of innovative products. In this meeting, the head of the design department presented an e-magazine produced with flash technology, combining flash, video, background music and interactive links. In the same meeting the idea of utilizing the idea of P2P technology to distribute e-magazines to solve the problem of insufficient broadband was proposed.

Liu Suhua, the vice president of Somode believes the most challenging part of e-magazines is production. Somode’s editorial team places heavy emphasis on leveraging Internet features in the planning, creating and packaging of their content. According to Liu (2006), the editorial team always discusses how to present content page by page. She believes the

132 strength of e-magazines is that the content of e-magazines can be stored like print media, while at the same time it can have multimedia and interactive features. For example, the e-magazine format allows readers of Me Beauty to examine the teaching process step by step by clicking computer icons (see Figure 6.1). In addition, the audience of Me Beauty can save make up, dress, fitness and other useful knowledge in a single file.

Figure 6.1: The Teaching Process of Hair Style with Flash Motion (Left is Step 1, Right is Step 2) Source: Somode Me Beauty Magazine.

Liu Suhwa (2006) says that visual designers play an important role in e-magazines. Visual designers are the gatekeepers of the audience. They need to make users feel comfortable with new reading styles, but not feel overwhelmed. Liu also admires professional staff, those who handle the content of Wo Style , especially in the module of Wo Girl , where the editors have to manage the subtle line between sexy and risqué girl photos which have become an essential element of many male magazines.

The editing processes are both in-house and out-sourced. Cheng says most of Somode’s editors have long experience in print media to produce excellent content. Some come from well-known magazines such as Taiwan Vogue and China Times Weekly . Cheng (2007) said that in order to achieve excellence in content development, Somode decided to focus on enhancing the current products instead of venturing into new products.

Somode also employs P2P techniques to distribute and create the order system of its e-magazines. When Somode’s readers want to make an order, they need to download particular software and tick the e-magazines they want to order. Afterwards, the order

133 system will automatically download the latest e-magazine every month while these users are online. Each e-magazine is 20~30 Megabytes, a file size that reader feels comfortable to download rather than read on-line (Hu 2006). ‘Somode does suggest online reading of e-magazine, the quality of reading experience may suffer in cases of insufficient bandwidth’ Cheng Yiwei said (cited in Sohu 2007). At the time of the interview he had no intention to allow Somode’s e-magazines to be read on mobile phone with SD card. In Cheng’s opinion, it is difficult to display the quality of Somode’s magazines via such small mobile phone screens (cited in Sohu 2007).

Me Beauty and Wo Style have been published on DVD cooperating with publishing houses in Shandong and Shaanxi from 2004 to 2005. This kind of publication needs a corresponding publication number for release (see Figure 6.2).

Figure 6.2: Wo Girl - The Most Popular Module of Wo Style Magazine Source: Somode Wo Style Magazine (2007)

Cheng Yiwei believes that while Somode’s technique has no threshold for rivals, Somode is innovative in original content and marketing (cited in Sohu 2007). Innovation and creativity are key competitive elements of Somode. Compared with other e-magazine firms, Somode looks more like a fashion media editorial office. Cheng (2007) believes that ‘Content should earn the first barrel of gold of an e-magazine’. He also regards e-magazine as a medium that should have the same profit model as a traditional magazine. Although distribution is a

134 significant area of e-magazines, the value of platform service providers depends on the existence of large amount of authoritative e-magazines (iresearch 2007). During 2005 and 2006, venture capital firms invested in three top Chinese e-magazine platform service providers: Xplus, ZCOM and Poco. All of them have transformed their business models (iresearch 2007). Xplus has developed digitalized traditional newspapers; ZCOM downgraded its e-magazine segment as a business unit and focused on its download software business Flashget; and Poco has given up e-magazines and transferred its business to personal web space.

In addition, the amounts invested in e-magazine content providers are much smaller than platform service providers. Compared with traditional magazines, e-magazines can save over 60 percent in management costs, including the expense of publishing and distribution (Chen 2006).

Strategy #2: Advertisement Strategies

Another pre-eminent strategy of Somode is advertiseing, including strengthening the styles and significance of e-magazines. Somode provides full screen advertisements, which are profoundly interactively rich. Most advertisements in Somode’s magazines have become more colourful. They sometimes include a psychological test, videos and small games to communicate with their clients. Liu Suhwa (cited in Chen 2006, 21) believes ‘Advertisements in multimedia magazines usually integrate with content closely, sometimes readers do not regard they are advertisements’. Somode provides shortcuts to link readers to advertisers’ official or activity websites. In this model, advertising in e-magazines has become a successful tool of public relationship and marketing.

Another advantage is that Somode can provide advertisers with the download volume of magazine, the average reading minutes of users, the click rate of advertisements, minutes per view, advertisement cost per click and other audience analysis, such as demographic statistics and reading preferences. Cheng said Somode’s advertisement with flash motion has standard versions for advertisers to choose from. Advertisers also can assign advertising

135 companies to produce advertisements in line with the format requirement of Somode: JPG or FLA files less than 1Mb. Somode’s advertisement fee is figured on a case by case basis and sometimes Somode will waive the production fee. Somode also has soft advertising combined with the content which advertising fee is $US 7,500 to $US12, 360 per time.

Some advertisers still query whether e-magazines can be regarded as media and for this reason Somode has fewer direct advertisers than before. However, according to Cheng, the success of advertisements is resulting in repeat advertisers, such as LG, Lancome, and Gillette. According to Administration of Press and Publication (Copyright Bureau) of Jiangxi Province (2007), the average advertisement income of Me Beauty and Wo Style was over $US 50,000 per month in 2007.

In order to reinforce the influence of e-magazine to advertisers, in July 2007 Somode signed a contract with Muzine for further partnerships in advertising, content, and distribution. Muzine is one of the earliest e-magazines in China, a business unit under Music Radio, China National Radio. Muzine draws on the rich music information and powerful media promotion of Music Radio to obtain income from advertisers (De 2006). The affiliation with Muzine increases the range of Somode’s content. According to the contract, Somode has become the chief advertising agency and distributor of Muzine in the China market. Meanwhile, Muzine provides content to support Somode (Donews 2007). Cheng believes that Somode will always devote itself to providing exquisite content with a youth and fashion focus. In this regard Me Beauty and Wo Style have proved to be the outstanding successes of Somode. In 2005, Me Beauty , Wo Style and Muzine almost dominated the whole e-magazine market (Chen 2006).

Experts of e-magazine industries such as Donews (2007) believe this cooperation will confirm the authority of Somode. Muzine will develop rapidly with the use of this popular platform and the help of Somode’s adverstisers. This agreement is seen as a win-win. The most far-reaching impact perhaps is that advertisers will regard e-magazine as a single media in drawing up an advertisement budget. According to the organization figure of Somode (see Figure 6.3), Somode has an extensive marketing department, responsible for

136 payment and promotion of theme books, website’s design and updates, customer service, promotions, PR, events and distributorship.

Figure 6.3: The Organization Figure of Somode Source: Cheng (2007)

In addition to advertising income, Somode still obtains profits from themed books. As I mentioned before, users need to pay average of US$ 1.90 to US$2.50 per month to download Somode’s themed books. The subscription price varies in different provinces. In addition, diverse payment methods also mean minor price differences. For example, Guangdong telecommunications and cell-phone businesses levy commissions and so the subscription price varies accordingly.

Strategy #3: Management Buyout and Venture Capital

In August 2007, Somode was named one of Red Herring 100 Asia Company. It is not only the sole e-magazine media in this list, but also the first time a Chinese e-magazine content provider won this honor. Red Herring covers technology, innovation, financial strategies, and capital venture. Its list is an important part of a tradition of identifying new and innovative technology companies and entrepreneurs worldwide. Excellent global Internet firms such as Google, eBay, Alibaba and Allyes ADNetwork have all won the Red Herring 100 Award (DoNews 2007).

137 As mentioned above, in the initial stages Somode was a wholly owned enterprise, invested by Fashionow. Some senior officers of Fashionow acquired Somode through a process of ‘management buyout’ in April 2007. In July 2007, Somode acquired the first round of venture capital (VC) with $US 5 million fund from Japan and Singapore. Cheng Yiwei strongly resisted the view that the e-magazine market was in decline: ‘In fact, other investors still contacted Somode after this round of VC, and expressed their interest in our magazines’. Somode reached break-even in July 2007. Although the amount of the profit is not immense, Cheng felt satisfied about the present situation and expressed confidence in better profits in the future (cited in Sohu 2007).

6.3 iPartment: Friend-Making Website in China

The third case study is an example of how avatars are successfully employed as a business model in Social Network Service (SNS) websites in China. The innovation in this case is of entrepreneurs utilizing the concept of Web 2.0 41 to increase the page view (PV) of websites to attract advertisers, and also using avatars to obtain profit from members. The entrepreneurs are the four founders of iPartment from Taiwan

In August 2003, four high-school friends established iPartment, a holding company in the Cayman Islands with a branch in Taipei. iPartment set up another branch in Shanghai in July 2005. The four founders of iPartment are: CEO Chang Chaming who studied in the Department of Economics, National Chengchi University; Jamy Lin, the vice-CEO of iPartment who has an IT background and is in charge of Taiwan iPartment at present; Lin Dongqing who studied in medicine, but his speciality is marketing; and Shu Yufan who studied in the Department of Advertising, National Chengchi University and specializes in copywriting. Chang and Lin are in charge of China iPartment at present. However, issues related with the firm’s strategies are still resolved through discussions among the whole team. At present, iPartment is the biggest Web2.0 Avatar －Social Network Service (SNS)

41 Web 2.0 is a trend that aims to facilitate creativity, information sharing, and, most notably, collaboration among users. These concepts have led to the development and evolution of web-based communities and hosted services, such as social-networking sites, wikis, and blogs.The term became notable after the first O’Reilly Media Web 2.0 conference in 2004.

138 website in China.

The start-up company iPartment experienced many difficulties. It did not have enough money to advertise and expand its servers in its initial stage. Despite this setback, many users registered through word-of-mouth. In early 2004, iPartment tried to introduce paid services into iPartment. Because this enabled users to acquire better services, these were popular at the time. iPartment reached the break-even point after just four months (NetEase 2006).

iPartment built its first Chinese branch in Shanghai in July 2005 and changed its domain name from www.i-part.com.cn to www.ipart.cn in February 2007. iPartment compared the cost of computer labs between Beijing and Shanghai in advance, and the result is similar. Why did iPartment still choose Shanghai to set up the first branch? According to Lin, Shanghai has metropolitan cash flow and steadier Internet service providers (ISP) and equipment service providers. He believes Shanghai is more similar to Taipei: lively, a similar climate, and there are more Internet companies. iPartment’s guanxi in Shanghai is also better than in Beijing. In Jamy Lin’s opinion, the most urgent challenge for China iPartment at the beginning was marketing. Familiarity with greater numbers of Taiwanese firms has meant more opportunities for cooperation.

In the initial stages of entering the Chinese market, China iPartment faced strong competition from the Korean community website CY World. CY World entered the Chinese market one month before iPartment. However, iPartment caught up very quickly, and obtained a similar market share with CY World by November 2005. After iPartment benefited from iDT’s venture capital in Jan. 2006, it distanced itself from CY World. Lin believes that this success is due to the fact that Koreans might not understand Chinese thinking and habits. Chang (cited in Tom.com 2007) also agreed CY World is iPartment’s biggest competitor in China, but that China CY World does not operate as well as Korea CY World. In addition, China iPartment faced the problems of some websites plagiarizing its concept; some even released false news to attack iPartment.

139 Chang Chaming said (cited in ENet.Com.Cn 2007) that China iPartment focused on membership accumulation and cultivation of user patterns in 2005. In 2006, China iPartment developed significantly: the annual profit grew 100 percent, the amount of members grew 500 percent, and advertising profits increased 3,000 percent (NetEase 2006). China iPartment had 100,000 registered subscribers by August 2005. In December 2006, iPartment’s users had grown to 3,000,000 and its global ranking reached 200th by Alexa Traffic Rankings in the world 42 (iPartment 2007).

China iPartment won several honors from other media and institutes including the 2007 Chinese Top 10 Innovation Business Model Award, the 2007 Annual Best 100 Investment Websites and The Most Potential Company: Internet Friend-Making Category 43 .

Strategy #1: Girl Strategies

The most important strategy of China iPartment is the product itself. iPartment identified an opportunity to establish an advanced friend-making website for the white-collar market in China. One strategy is ‘girl strategies’.

The founding team pieced the concept of iPartment together. At first, they just wanted to build a friend-making website. However, Yahoo launched the same function in advance of

42 Alexa Traffic Rankings are based on the anonymous usage patterns of million of Alexa Toolbar users based around the world. Site rankings are updated daily and based on a combined measure of reach and page views computed over a rolling three-month period. Reach is determined by the number of unique Alexa users who visit a site on a given day; page views are the total number of pages viewed by Alexa users. In January 2006, iPartment’s members accumulated to 500,000, and global rank reached 1,500 on Alexa. Next, iPartment’s subscribers have accumulated to 1,800,000 and the global rank reached 800 on Alexa in June 2006. 43 Business Next Magazine awarded Sunfun 2006 Global Top 100 Best Business Model Company in Jan 2006. Zero2IPO Group, a well-noticed Chinese venture capital company selected iPartment as The Best 100 Investments in China in December 2006. China Internet Weekly awarded iPartment as one of The Best 100 Chinese Internet Company in Jan. 2007. iPartment won the 2007 Chinese Top 10 Innovation Business Model Award from China Information World, and 2007 Chinese Top 10 Potential Investment Award by CCIDMedia in January 2007. According to iResearch, iPartment ranked 39 in Chinese websites, and second in Chinese friend-making websites in January 2007. China Internet Weekly awarded iPartment one of 2007’s Chinese Top 50 Cool Websites in February 2007. iPartment was awarded one of 2007’s Best 100 Investment Websites and 2007 Annual Top 100 Influential Websites by the 2007 Internet Innovation Entrepreneurs Conference, held by Ministry of Information Industry in March 2007. iPartment was awarded The Most Potential Company: Internet Friend-Making Category by New Economy Annual Conference hosted by iResearch in April 2007. iPartment’s CEO Chang also won the New Economy Annual Best People.

140 iPartment. iPartment then changed its strategy to position itself as a female friend-marking website. The logic was: if iPartment could attract more female members, then female users will attract male members, too. This strategy explains why iPartment does not need pornographic and violent content (Tom.com 2007).

Chang Chaming says: ‘Young girls like daydreaming, raising pets, writing articles, and their own personal featured space’. iPartment provides all of those functions and pays attention to online interaction (cited in Tom.com 2007). In order to increase members’ interactions, iPartment awards users who engage in activities online at with points, which can be used to rent or buy avatars. Another way to rent or buy avatars is to spend money to change virtual money called ‘i dollar’. In iPartment, one ‘i dollar’ costs one RMB Yuan.

China iPartment’s ‘girl strategies’ have five aspects. First, the founders wanted to make the website’s name more romantic, and so they researched the names of Korean dramas. Finally, they decided on iPartment. The meaning refers to love apartment, following the preference of female interviewees (Tom.com 2007). iPartment conducted interviews on the street to understand female interests, Internet habits, and preferable layout of web designs, such as color, emotions and functionality. After analysis iPartment produced three trial editions (NetEase 2006). According to Chang Chaming, iPartment continues to focuses on female users’ suggestions, especially webpage designs, functionality improvement and detail process update. See Figure 6.4 below for an example of the homepage. For instance, iPartment’s e-shopping mall layouts were updated three times in 2006, and every change was a result of survey and research from users’ feedback.

141

Figure 6.4: Some Objects in China iPartment’s Homepage Source: iPartment http://www.ipart.cn/ (2008)

Second, different types of apartment, furniture, decorations, clothes and pet food can be chosen by iPartment’s members. In the beginning, members acquire a free single suite. They can pay $RMB 0.2 to 0.9 to rent other styles of apartment, such as a two level flat, a business-style flat, a country cottage or a riverside villa. The price of furniture is $RMB 0.4 to 1.2 and includes wallpaper, lamps, bookshelves, sofas, computers, TV, bathing pool, microwave, hammock, even mahjong table, and a swimming pool (see Figure 6.5 for an example). iPartment also provides hundreds of different kinds of apparel from hip-hop, sports, ladies evening dress, national costume and cosplay44 clothes. A suit price is $RMB 0.6 to 0.9 per 30 days. If members want to change hairstyle, face, accessories, even the shape of head, they need to pay $RMB 0.1 to 0.3 per 30 days. Users can try on all clothes and accessories then decide which one to buy. Users can buy these clothes and furniture for others as a gift. In addition, users can create a gift list in their suite. Members also can show their love with a bundle of ready-made or DIY flowers; the price is $RMB 6 to10.

44 Cosplay short for ‘costume play’ is basically describing performing-art behaviour of self-rigging out as a character with corresponding costume and accessories.

142

Figure 6.5: One of Luxury Suite in iPartment Source: http://www.ipart.cn/room/room_bestroom.php

Third, members can freely adopt pets, including dogs, cats, rabbits or penguins but users do need to pay for pet food (see Figure 6.6 below). The pet food has three different levels. Feeding high quality food gives pets a life index higher than normal. Users who own a private garden can plant roses, lilies, sunflowers and lavender.

143

Figure 6.6: One Bustling Animal Room in iPartment Source: http://ives.pet.ipart.cn/

Fourth, users can write diaries to express their opinions and feeling. The diary’s function is similar with a blog and is free of charge. Users can choose a ready-made diary layout for $RMB 1.7 per 30 days to attract people’s attention.

Fifth, iPartment, the brand name, has the following features: health, safety and trust. iPartment cooperated with ID information service provider ID5 to introduce ‘Idtag Service’ into iPartment in March 2007. The Idtag Service system integrates with ID5, National Citizen Identity Information Centre (NCIIC), The Ministry of Public Security, chief telecommunication firms, and banks to differentiate immediately between true and false online information by providing users’ name and identification card (ID) numbers. On the other hand, users only need to provide their mobile phone, e-mail address, bank account and other personal information to obtain a unique five digital Idtag Numbers to validate their online identification. Idtag Service accepts authorized search by oneself therefore users need not be afraid of divulging their personal privacy (Sohu.com 2007). iPartment also combined with six other friend-making websites such as Baihe.com, 96333.com to set up The Service Union of Sincere Friend-making in employing the Idtag Service system.

144 Chang Chaming says: ‘If the headline can be associated with pornography even though content is healthy, iPartment also will delete it’. These actions differ from other websites eager to catch users’ eyes using pornography (cited in Tom.com 2007). After a series of efforts, the gender ratio of iPartment’s member reached almost 1:1, much more balanced than the average gender ratio of 7:1 (male: female) among other friend-making websites.

As I mentioned above, users can pay real money to obtain advanced services in iPartment. However, most Avatars have a limit of their period of validity, usually 30 days. Of course, some loyal members prefer to ‘rent’ the Avatar longer or join the VIP members to acquire some discount. This way also creates the cash flow of iPartment. According to Chang Chaming, every member usually spends on the average RMB 10 per month.

At present, the chief revenue of China iPartment is equally divided into three parts: advertising, VIP membership and Avatars (NetEase 2006; Tom.com 2007). VIP members need to pay $RMB 12 to enjoy discounts, bigger album space, some free Avatars and high priority in iPartment’s search results per month. Chang Chaming (cited in NetEase 2006) believes that users could use iPartment for free; however, some who identify with iPartment still tend to pay little money to obtain advanced service. Chang Chaming explained that iPartment employs telephone companies, Internet bank, Shanda, Alipay.com, and Shen Zhou Xing Card to collect Avatar payments, similar to the prepaid cards of online games (cited in Tom.com 2007). Jamy Lin mentioned that most payment systems are built by China iPartment itself but are still not perfect at present.

China iPartment also manages Wireless Application Protocol (WAP) by itself; otherwise, Taiwan iPartment authorizes Monday Tech Co. to manage WAP business. China iPartment also developed the function that VIP members could send Short Message Service (SMS) to other users by employing i dollars. This service has seen considerable growth, according to Jamy Lin (2007).

Chang Chaming believes (cited in NetEase 2006) iPartment’s core competitive capacity is creativity and innovation. The functions of iPartment are simple and exquisite. iPartment’s

145 users do not need to provide real names to have ‘common-law marriage’ online. The members who live together online can enjoy a ‘couple’s life’ and buy furniture, visit neighboring houses, take care of pets, gardens and share responsibility for the house duties. Jamy Lin (2007) notes that China iPartment’s uniqueness and characteristics have attracted several media outlets to report on it, and there have been inquiries from foreign countries, including Russia, U.S.A., Brazil, Malaysia, Singapore and Japan. Expanding iPartment to other countries is an important goal in the future. The next important step of iPartment is to develop related goods.

Strategy #2: Web 2.0

Another strategy of China iPartment is to employ the concept of Web 2.0 and local marketing to increase the page view (PV) of websites to attract members. This strategy also capitalizes on the cultural proximity of Taiwanese digital content firms.

According to Chang Chaming, China iPartment’s initial target customers were students in universities, probably 18 to 22 years old. However, after the website was launched they found its member groups included white-collar, senior students in universities, and even middle-aged users. This result was a big surprise to Chang 45 (cited in NetEase 2006). Jamy Lin (2007) further explained the strategy in the early stages. He believes the netizen behaviour is different in Taiwan and China. For this reason iPartment never considered transferring the total content of Taiwan iPartment to China. Chinese netizens are used to large amounts of information, crowded words and photos in their websites. In comparison, Taiwanese netizens are more inclined to emphasize feelings.

Before iPartment entered China in 2005, it conducted 6 to 8 months’ fieldwork. At first, the web structure of China iPartment was 80 percent similar with Taiwan iPartment. Jamy Lin said the concept of Web 2.0 was not popular in Taiwan in 2003. Therefore, iPartment positioned itself as a friend-making website with some community functions, such as the

45 The other features of target customers of China iPartment: they are females from big cities such as Shanghai, Beijing, Shenjun, and Guangzhou. They also have strong expenditure ability with average salaries are over $US 250 per month.

146 diary and album. Web 2.0 flourished in 2006 and surged in 2007 in China. China iPartment moved closer to Web 2.0 functions, employing Cascading Style Sheets (CSS) to design diaries and advance the album service. In this way, China iPartment gradually transformed from just a friend-making website to mix blog, recreation, and friend-making functions. China iPartment had 40 percent similarity with Taiwan iPartment at that time. The overall strategy of China iPartment has adjusted. In Lin’s opinion, he supports this kind of modification. He believes that if iPartment only had a friend-making function, a lot of users would leave after their demands were met. If the members can co-create website content, they will stay longer.

Jamy Lin compared different strategic positions nowadays between Taiwan and China iPartment. Taiwan iPartment is not a pioneer and already has a certain market share, and membership. At this moment, Taiwan iPartment puts its efforts into customer services, such as enriching content, improving the return ratio. On the other hand, China iPartment is still in its growth stage, thus continuous innovation, product adjustment and marketing are all-important. According to Chang Chaming (cited in NetEase 2006), China iPartment’s marketing department is professional in market research, and gives managers suggestions from customers to improve content and functionality. In Chang’s opinion, the work environment is quite important and an open atmosphere is conducive to happy staff (cited in QQ.com 2007). Chang Chaming has gone out of his way to create an open and happy environment for his staff. One measure is for him and his staff to write down their ideas on windows to share with each other and to inspire further ideas.

China iPartment also introduces other fashion and international elements into their local activities. iPartment has obtained some support from other Taiwanese firms, including GameSoft and HIM. China iPartment cooperated with GameSoft’s well-known online game Love Box to attract those users to register iPartment in October 2005 46 . Because Taiwanese singers are popular in China, iPartment also collaborated with some Taiwanese record brands, such as HIM. In 2005, HIM’s leading singer S.H.E. created S.H.E. Star Suite, which provided their latest single, MTV, and private childhood stories in iPartment. ‘Star Suite’

46 GameSoft’s members just need to fill in their account and password on activity webpage locating in ‘Love Box’, then they could acquire 5 I dollars from iPartment.

147 (see Figure 6.7 for an example) is welcomed by iPartment’ users.47 Following this, other well-known Taiwanese idols have participated in iPartment’s Star Suite to promote their new records, such as Jay Chou, Victor Huang, and Fahrenheit. According to Lin, China iPartment shares a certain percentage of profit from ring tone downloads with record companies. In addition, iPartment creates Model Suites to attract more members.

Figure 6.7: Popular Singer Sun Yanzi’s Star Suite Source: iPartment http://yanzisun.room.ipart.cn/ (2008)

In August 2005, iPartment and ShTickets.cn hosted the 10th anniversary of Zhang Eileen death. Zhang Eileen, a Shanghai-born female writer in 1930s, had a significant reputation both in China and Taiwan. iPartment set up Chang Eileen Diary Soliciting Column to select Zhang Eileen memorabilia. In September 2005, iPartment cooperated in another activity with ShTickets.cn again. The prizes of this activity were the hottest concert ticket, to the Shanghai Top 10 Super Girls Traveling Concert.

China iPartment’s real love stories also produce powerful performances from iPartment. Zhu Feng and Ann Jing, who met each other on iPartment in December 2005, and were married

47 In 2006, S.H.E.’s latest single ‘Ring Ring Ring’ reached 10,000 listening requests in the few hours after it was launched on iPartment (QQ.Com 2006)

148 in February 2007 in Beijing. They were invited by various media to tell their love stories, including GeHui Dream Factory at Phoenix TV (NetEase 2007). In addition, China iPartment hosted an activity called To Date on iPartment in 2006 (QQ.Com 2007). iPartment and famous Internet writer Li Xunhuan selected 60 articles from over 10,000 submissions. After that, iPartment held an online election to decide the final 20. After four months the final 20 articles were collected for a book Love Apartment, which was published by the Shanghai People’s Publishing (Shanghai Renmin Chubanshe) in May 2007. iPartment was the first website to help members publish their real love stories from the virtual world.

Strategy #3: Customized Advertisements

China iPartment’s advertising business started in 2006, but it already has many famous clients, including eBay, Sony, Lancome and Alpenliebe (NetEase 2006). Furthermore, China iPartment has set up a single advertising sales department. The income from advertising in 2007 was $US 62,000 per month (Sohu.com 2007).

China iPartment’s advertising agents are divided into North China, Central China, and South China districts. China iPartment usually hires local public relationship staff who is responsible for these agents. Taiwanese staff are often regarded as too polite and not overbearing enough.

According iUserTracker 1.0(QQ.Com 2007), China iPartment is the highest PV friend-making website in February 2007. China iPartment’s average page view figure is higher than the second website by almost seven pages and double the average among the top ten websites at 9.47 pages (see Figure 6.8). Tom.Com (2007) also proofed China iPartment users’ ‘stickiness’ is higher than other Social Network Service (SNS) websites. The average page view (PV) of iPartment per day was 20 pages in March 2007.

149 Figure 6.8: Chinese Friend-Making Websites PV per day in February 2007 Source: QQ.Com (2007) http://finance.qq.com/a/20070427/000400.htm

According to iResearch (2007), the visiting frequency of China iPartment’s white-collar users48 per day was 1.66 times in 2006. In 2006, China iPartment white-collar users’ visiting frequency is higher than average at 79 percent. In addition, China iPartment white-collar users’ visiting frequency in 2007 is higher than average again at 95.5 percent (see Figure 6.9).

48 White-collar users in this survey mean those users which salary over RMB 3000

150

Figure 6.9: iPartment White-collar Users’ Visiting Frequency per day is Much Higher than Average of All Friend-making Websites (iUserTracker-2006Q3-2007Q1) Source: iResearch (2007) http://news.iresearch.cn/viewpoints/65301.shtml

Strategy #4: Venture Capital

One of China iPartment’s strategies is to introduce venture capital (VC). In May 2005, Chang Chaming’s friend introduced him to the president of iD TechVenture (iDT)49, Chen Youzhong. According to Jamy Lin, at the beginning, they just had a chat and did not come straight to the point. According to Chang (cited in Sina 2006), iPartment had never considered the idea of bringing in VC firms. iPartment was dependent on profits and cost control was very important for growth. In January 2006, iPartment introduced the first round investment with US$ 1 million dollars from iDT Venture (Sohu.com 2006).

Venture capital firms help to provide a road map for development and provide some technical support, but do not interfere with iPartment’s everyday operation. Chang Chaming (cited in Sina 2006) also agreed with Lin. Chang said JV firms are important partners of

49 iDT established at the beginning of 2000, the original name is Acer Technology Ventures. iDT manages

151 iPartment, and they help and support each other. For example, when iDT Venture enlisted new round funds, iPartment helped to provide 20 to 30 different PowerPoint files for each potential limited partner (LP) of iDT.

In October 2006, iD TechVenture (iDT), JAIC, and Cyber-Agent invested a second round of funds in iPartment, this time a total of $US 3 million. CyberAgent is the biggest Internet advertising agency and the third largest Internet media company in Japan. In Chang’s opinion CyberAgent’s investment into iPartment not only provides advanced experience but also improves iPartment’s Avatar design capacity. Chang Chaming believes the essence of VC is to combine each side’s resources. Funding is just one kind of resource. Chang emphasized: ‘Not everyone’s money could be taken. If a firm meets with a good cooperative partner this effect will be 1+1 = positive’ (cited in ChinaVenture 2007).

Chen Youzhong, the president of iD TechVenture has revealed why iDT invested in iPartment. First, iDT has an optimistic view of virtual communities, and iPartment earns profit from Avatars and Internet advertisements, instead of just value-added services (Sohu.com 2006). In addition, iPartment already has substantive incomes, and has passed the initial stage to becoming a mature website. There is a relationship of trust between the parties. That is also an important reason to invest in a company. Chang Chaming (cited in Sina 2006) shares a similar opinion to Chen. He mentioned that the most important points for VC firms are honesty, trustworthiness, and responsibility for financial figures.

Jamy Lin believes that the Internet speed is very important in such community websites. If members have to wait a long time when they use a site, they tend not to revisit. In this way, the first round of funding from JV was mainly employed to purchase servers, and advertisements to promote iPartment’s brand. Chang (cited in NetEase 2006) believes human resources are the most important assets in this kind of Internet firm. China iPartment needs to increase outstanding human resources. The second rounds of funds have continued to be invested in hardware and other funds are being used to attract more high quality employees.

$US 300 million dollars of limited partners’ fund, focuses on Pan China Hi-Tech businesses (Sohu.com 2006).

152 6.4 Conclusion

In conclusion, I return to the question of market strategies of the three firms. The first strategy of Shanghai CnYES was to provide original global professional financial news to attract financial investors to operate advertisements and E-Commerce business, such as online investment and online consultation. The second strategy of Shanghai CnYES in January 2005 set up Tai-son.Com to provide services to Taiwanese firms in China and firms intending to invest in China. The third strategy of Shanghai CnYES is to integrated resources with Taipei CnYES to result in synergy.

The evolution of CnYES’ market strategies can be divided into two stages, as shown Figure 6.10. The first stage from 2000 until now built the financial brand in China, and developed E-Commerce business. The second stage from 2005 until now created a new website product Tai-son.Com, and increased cooperation and synergy with three websites.

Decline Stage

Maturity Stage

Growth Stage

Introduction Stage Tai-son.Com Synergy E-Commerce

1995 2000 2005

Figure 6.10: The Evolution of CnYES’s Entrepreneurial Strategies Source: Researcher Compiled for This Study

The primary strategy of Somode was its e-magazine format. Somode’s e-magazines converge all interactive materials, including voice, music, video, and games to provide a rich media environment. The participation of users becomes a real thing, not just a ‘slogan’. The users can read, listen or play Somode’s e-magazines totally on demand. Another

153 pre-eminent strategy of Somode is advertising strategies, including strengthening new styles and the significance of e-magazines.

The evolution of Somode’s strategies can be divided into two stages, as shown in Figure 6.11. The first stage from 2003 until now created the new format of e-magazines and advertisements. In this stage Somode processed technical transfer from Taiwan and redefined the e-magazines as media. The second stage from 2007 until now saw the company restructuring via a management buyout and venture capital investments.

Decline Stage

Maturity Stage

Growth Stage New Format E-magazines and Advertisements

Management buyout and VC Introduction Stage

1995 2000 2005

Figure 6.11: The Evolution of Somode’s Entrepreneurial Strategies Source: Researcher Compiled for This Study

The most successful strategies of iPartment are its products and service. iPartment identified an opportunity to establish an advanced friend-making website for the white-collar market in China through its so-called ‘girl strategies’. Another strategy of iPartment was the use of the concept of Web 2.0 and local marketing to increase the page view (PV) of websites. This strategy illustrates the cultural proximity of Taiwanese digital content firms. The third strategy of iPartment has been more customized advertising. China iPartment’s members have a high number of page views, and this is suitable for advertisers to build up brand loyalty. The last strategy of China iPartment has been the introduction of venture capital. The evolution of iPartment’s strategies can be divided into two stages, as shown in Figure 6.12. The first stage shows an establishment in the base of users and a niche market in China.

154 The second stage from 2006 until now illustrates Web 2.0, customized advertising and venture capital.

Decline Stage

Maturity Stage

Growth Stage White-collar and girl strategies

Introduction Stage Web 2.0, Customized advertisements, VC

1995 2000 2005

Figure 6.12: The Evolution of iPartment’s Entrepreneurial Strategies Source: Researcher Compiled for This Study

155 Part 3: Synthesis

Chapter 7

This thesis set out to provide an understanding of how Taiwanese digital content firms operate their international entry strategies into the Chinese market. In particularly, how distinctive business practices such as guanxi are important to Taiwanese business and to relations with Mainland China. In this chapter I analyse the findings and pay particular attention to the three sub-research questions proposed in chapter one:

1. How have small and medium Taiwanese enterprises managed to compete in China where policies favour the growth of domestic enterprises?

2. What strategies have Taiwanese digital content firms adopted to compete in the Chinese market?

3. How significant is the role of business practices such as guanxi to Taiwanese business success in Mainland China?

In responding to these research questions, I divide my findings into three parts: (1) ‘entrepreneurship in China and Taiwan’, (2) ‘strategies in China’ and (3) ‘entrepreneurial guanxi ’. In the first part, I examine the particularity of China’s entrepreneurship in the context of China’s atypical environment. Furthermore, I discuss the entrepreneurship in Taiwan, and what Mathews (2007) has termed a ‘strategizing in disequilibrium framework’. In the second section, I explore how Taiwanese digital content entrepreneurs have adopted the strategies in the Chinese market and how Taiwanese entrepreneurs have utilized the characteristics of digital content industries. In the final section, I pay particular attention to the questions of cultural proximity and relationships. In this final section I further illustrate the concept of ‘entrepreneurial guanxi ’. I demonstrate a model: ‘Taxonomy Matrix of Entrepreneurial Guanxi ’, and examine the dynamic process between entrepreneurship,

156 strategies and entrepreneurial guanxi .

7.1 Entrepreneurship in China and Taiwan

As mentioned throughout, there are different firm structure of digital content industries in Taiwan and China. Taiwan maintains high numbers of small and medium enterprises (SMEs). China now has many digital content SMEs but it also has a policy environment that favours the emergence of larger companies, even if the results are yet to be shown. I will discuss the unlike entrepreneurship in China and Taiwan in this section to respond to my first reseach question

How have small and medium Taiwanese enterprises managed to compete in China where policies favour the growth of domestic enterprises?

Entrepreneurship in China is complex, and it can be argued from my study that it does not reflect the literature on entrepreneurship developed in capitalist environments. The development of entrepreneurship in China has undergone several important stages. After the Chinese Communist Party (CCP) came to power in 1949, private businesses gradually disappeared. In the early years of the new regime (New Democratic Revolution) state and private enterprises coexisted. From 1953 to 1956, the nationalization of private properties encompassed all major industrial areas. With the establishment of People’s Communes in 1958, the elimination of private properties reached a peak. Private business then completely disappeared during the Great Proletariat Cultural Revolution (1966-1976) (Yang 2007, 10, 73-74).

Entrepreneurship has witnessed a revival since the late 1970s and has eased problems of unemployment and poverty. From 1978 to 1986, however, there was a long period in which there was no guidance to this component of the national economy by the Party: that is, no talks, no documents, and no research on entrepreneurship. 1987 was a crucial year for private enterprises in China (Yang 2007, 79-92). The CCP thirteenth National Congress granted private businesses a legitimate status. In June 1988, the first official sanction of

157 private business The Interim Stipulations on Private Enterprises was issued by State Council. The next significant growth of China’s entrepreneurship was Deng Xiaoping’s talk during his celebrated South China Tour in 1992, when he proposed the ‘Three Benefits 50 ’ (san ge you li yu). Yang writes: ‘For nearly two decades (the 1980s and 1990s), most entrepreneurs in China found the overall institutional environment becoming more and more liberal but many institutional rules still unfair, constraining, discriminating, and even hostile’ (Yang 2007, 92).

Yang (2007, 127) notes two categories of strategy that entrepreneurs in China have employed: firstly, to maximize the use of ‘informal resources’ such as money and information; secondly, to make use of ‘institutional holes’, including renting state enterprises titles, gaining legitimacy by connecting with local governments and state enterprises, and manipulating administrative procedures. Zhu Chun-Yang says the concept of entrepreneurship in China is a like the Chinese saying ‘the first barrel money’. There are two main ways to obtain this ‘first barrel money’51 in China: market speculation and conspiring with administration and power. Because of a lack of professionalization in digital content industries at present, ‘market speculation’ has taken precedence. Furthermore, because the Chinese administrative system is based on a power structure that can absolutely dominate resource distribution and achieve the purpose of wealth accumulation, ‘conspiring with administration and power’ becomes the optimal way to obtain the first barrel money. This has lower political risk. In other words, security comes from being connected.

More particular to entrepreneurship in China is the link between entrepreneurship and its institutional environment. Zhu Chun-Yang believes, ‘Because the Chinese administrative system is based on a power structure that absolutely dominates resource distribution, and achieves the purpose of wealth accumulation, conspiring with administration and power for digital content firms means lower political risk and more security’. Reform of state-owned

50 Deng mentioned that, ‘The chief criterion for making that judgement should be whether it promotes the growth of the productive forces in a socialist society, increases the overall strength of the socialist state, and raises living standards.’ 51 ‘The first barrel money’ means the first big amount of money in someone’s life, it is very critical let people to do high-risk investment or set up an enterprise to accumulate wealth quickly. ‘The first barrel money’ often means one million TWD in Taiwan.

158 enterprises is still being carried out in China. According to China.Org.Cn. (2008), there are 370 (74 percent) state-owned and state-stockholding firms among China’s top 500 companies. State-owned and state-stockholding firms also represent 96.96 percent of assets and 84.09 percent of profit in the top 500.

A similar structure also exists in digital content industries in China. According to Zhu Chun-Yang (2007), ‘institutional loopholes’ present specific problems within Chinese digital content industries. For example, local governments want to have their own digital content companies, but they are not willing to invest heavily. In addition, they do not allow other digital content firms to invest. Taking digital TV as an example, local governments want to make high profit from the set top boxes rather than from paid programs. For this reason there is a lack of emphasis on content, which in turn makes digital TV difficult to popularize.

Entrepreneurship in Taiwan

In the following section, I discuss the entrepreneurship in Taiwan and the ‘strategizing in disequilibrium framework’ (Mathews 2006). I also explore how firm-level entrepreneurship management complements strategic management in DCI in the Chinese market and how Taiwanese entrepreneurs have utilized the characteristics of digital content industries.

Miller’s three dimensions of firm-level entrepreneurship, introduced in chapter two, provide a useful approach to analyse entrepreneurship in Taiwan (Miller 1983). Miller’s three categories are innovation, risk taking, and proactiveness.

Innovation

Taiwanese entrepreneurs have demonstrated innovation in the high-tech field. According to the Ministry of Economic Affairs (2006), Taiwan was the 4 th largest recipient of patents from the US Patent Trade Office and ranked 2 nd for the number of patents per 1 million people in 2005. Taiwan’s main performances in patents are in the fields of semiconductor production,

159 LCD-related, and computer hardware/software technologies.

However, I believe that Taiwanese DC firms’ entrepreneurship can only be viewed as ‘limited innovation’. They rarely produce radical innovations. I identify just one radical innovation among these five cases: Somode’s new format for e-magazines. Of course, some innovations could be regarded as radical innovations in specified markets, such as in Asia or China. For instance, Artkey is the first firm to introduce the concept of art licensing to China. However, all cases endeavour to seek continuous and incremental innovations that illustrate modification and creative marketing of existing products.

Risk Taking

Most interviewees believe entrepreneurship in Taiwan is conservative and not so adventurous. Risks are minimal. This argument is coincident with another empirical result. Chen (2003) showed that Taiwanese manufacturing firms tend to take limited risks. As Edwin W.K. Lo, the chairman of Department of Advertising, Chinese Culture University says ‘People want to share risk’, (2007 Interview: 20 Mar). That is why few enterprises in Taiwan struggle alone. Most involve couples, friends and partners. He further explains the influence of Confucianism. Taiwanese are less adventurous and perhaps more cautious in decision making than entrepreneurs in China and Singapore. Taiwanese entrepreneurs embrace the Confucian doctrine of the ‘golden mean’: this is the felicitous middle between the two extremes, that of excess and deficiency. In other words, people prefer to take a middle-of-the-road approach.

Another reason is the financial system in Taiwan. Taiwanese digital content firms find it difficult to obtain loans from banks, and have difficulties in seeking out investors. Taiwanese digital content entrepreneurs tend to source their investments independently. This kind of situation also contributes to the conservative nature of Taiwanese digital content firms (Hsu 2007). The contrast between entrepreneurial spirit and inherent conservatism in Taiwanese DC firms seems a contradictory proposition, but it is not necessarily so. In Innovation and Entrepreneurship (Drucker 2004), Peter Drucker argues entrepreneurship is

160 ‘risk’ mainly because few entrepreneurs know what they are doing. Drucker employs the cases of Bell Labs and IBM to prove entrepreneurship need not be ‘high risk’; however it needs to be systematic and well managed. Taiwanese entrepreneurs indeed, take risks and this is demonstrated in the commitment of time and resources.

Proactiveness

Most cases in this study embody the spirit of proactiveness. The best example of proactiveness is the first-mover. The first-movers such as Artkey, CnYES and Somode have advantages of attracting customers’ attention, building brand loyalty, setting up entry barriers, and even deciding market prices. Some firms, such as iPartment, are unable to be the first-movers in the Chinese market, but they are still leaders, not followers.

Other interviewees mentioned a variety of features of entrepreneurship in Taiwan: the ability to bear hardships, diligence, entrepreneurial spirit, conservatism, and creativity. Alex Guo of Artkey believes the capacity of Taiwanese to endure hardships and work hard has diminished. Guo says that entrepreneurship in Taiwan is about ‘throwing a sprat to catch a whale’, in other words, using limited resources to achieve big targets. This reflects the tendency to favour SMEs.

Strategizing in Disequilibrium Framework

John Mathews (2006, 164-165) has proposed a ‘strategizing in disequilibrium framework’ in which he uses the acronym RARE. Resources are the foundation of the firm’s strategic uniqueness (e.g. production systems, technologies, equipment, brands, and property rights). Activities are in turn based on the resources assembled to operate (discrete economic processes, parts of the value chain). Routines link the chosen resources and activities (e.g. standard operating procedures, forms, rules, conventions, strategies etc.). Entrepreneurial action ties the resources, activities and routines together (the entrepreneur is a person who acts on an economic system in equilibrium to drive it towards disequilibrium).

161 This framework captures the major insights of current perspectives in strategy: ABV (Activities-Based View), RBV (Resource-Based View), and the DCP (Dynamic Capabilities Perspective). According to Mathews (2006: 130-131) the entrepreneur is central to innovation: ‘the entrepreneur creates new resource combinations, which then allow for the generation of new activities, requiring the construction of new routines by managers hired for the purpose. Thus the resources, activities and routines are tied together in a strategizing and entrepreneurial perspective.’

Although they have their specific business patterns Taiwanese entrepreneurship in the fives cases in this study follows the RARE framework. Wang Film integrates animation skills, international experience, capital and legitimacy in China as the foundation of its strategic uniqueness (Resource). Wang Film generates its revenue as an OEM animation firm for foreign companies (Activities). Wang Film has built a human resource management system to balance the quality and cost of animation films (Routines). Wang Film established its Suzhou branch as a suitable production base with cheap labour and efficient performance (Entrepreneurial action).

Artkey integrates knowledge of artwork licensing, a large number of licensed artworks from Taiwan, existing foreign clients, capital and international experience as the foundations of its strategic uniqueness (Resource). Artkey is an artwork licensing company and engages in various activities to acquire the artwork licenses and expand into new markets (Activities). Artkey has built a standard procedure of artwork acquisition and joins international licensing exhibitions regularly (Routines). Artkey has built its Shanghai and Beijing branches for acquiring a large number of high quality Chinese artworks. In additional, Artkey has successfully expanded its emerging market in China (Entrepreneurial action).

CnYES’s RARE framework is illustrated by integrating resources including operational knowledge of professional financial websites in Taiwan, its capital, international partnerships, and official guanxi in China (Resource); participating in various e-commerce models to seek better ways to obtain marked profit (Activities); building a series of management systems to modify website content regularly (Routines); and launching the

162 Shanghai CnYES and Taison Com websites to build some sole agency businesses and target Taiwan’s firms in China to acquire focus and valuable audiences (Entrepreneurial action). Somode’s resources include the P2P technique, the new format of e-magazines, the partnership with a noticeable e-magazine platform Xplus in China, the long-term experience in China’s market (Resource). Somode built its headquarters in Beijing and planned to generate profits from advertising in its e-magazines in China. At present, Somode releases new format (flash) e-magazines every two weeks and several themed e-books each month (Activities). Somode has built a series of editions and advertising systems (Routines). Somode has successfully launched two popular e-magazines Me Beauty and Wo Style in the Chinese market and continues to progress in content and technique innovations (Entrepreneurial action). iPartment’s resources include the Avatar technique, community management skills, capital, and successful experience in Taiwan (Resource). iPartment tries to expand its market and earn better profits from this friend-making website (Activities). iPartment has built well-designed online management systems for its friend-making website (Routines). iPartment has acquired regular income (from memberships, Avatars and advertising) from China iPartment (Entrepreneurial action).

These five cases have similarities. The main resources are technical know how, capital, international experience, and benefits from ‘institutional loopholes’, such as special guanxi with Chinese officials. Their activities focus on different kinds of digital content industries (animation, artwork licensing, e-commerce, e-magazines and friend-making websites), which are based on resources that they have assembled mostly through entrepreneurial actions. However, their main reasons for undertaking these activities are cost reduction and market penetration. In order to manage these activities, these firms have built routines such as standard management systems including product, marketing and customer management. Finally, these firms have built their branches in China to tie the resources, activities, and routines together. The processes of entrepreneurship among these Taiwanese digital content firms seem not so different from those of other countries. However, they illustrate some special features employed in the Chinese market.

163 First, some Chinese digital content industries are regarded as media by Chinese government, thus they relate with censorship and sensitive political issues; second, Western cultural imperialism remains a significant concern for the Chinese government. The government tries to establish strict regulations for foreign firms while supporting local media firms. With a similar cultural context, Taiwanese digital content firms need not confront the difficulty of cultural dissonance. Moreover, Taiwanese companies have cultural advantages in product design and management in China. As a result, Wang Film has become a leading animation firm, iPartment is the biggest SNS website, and Somode owns two of the most successful e-magazines in China. These successes draw on Chinese-style ‘resources’ such as familiarity to exploit ‘institutional holes’. Geib (2005, 126) has supported the importance of values and ethnicity in business and has illustrated this with an example of Taiwanese firms in Shanghai. Based on his on-site interviews, Geib notes that despite political tensions between Beijing and Taiwan there are approximately 300,000 highly successful Taiwanese firms in Shanghai.

I identify six critical success factors of Taiwanese digital content firms doing business in China. First, cultural adoption is the most important factor, including the language, local product modification and customer familiarity. Second, Taiwanese firms have established official guanxi as much as possible. Third, Taiwanese firms have utilised a wholly-owned entry mode together with strong partnerships. Wholly-owned or high control investment is a better entry mode in China because strategies and policies can be consistent with goals or visions. When Western digital content firms have significant cultural differences with Chinese society, it is better to cooperate with strong Chinese-based partners or employ trustworthy local people as managers. Fourth, Taiwanese firms have created innovative digital content products. Chinese customers tend to use local or familiar cultural products, unless Western digital content products have some fashionable or unusual features. Some Chinese use better quality products as a fashion statement. Fifth, Taiwanese firms try to employ local advantages, such as labour, distribution systems, media and other resources. Some Taiwanese use the concept of ‘brotherhood’ (tongbao) as a tool to obtain favourable conditions. Sixth, Taiwanese firms have patience and persistence in negotiations. Even for Taiwanese digital content firms, China is a tough market. Most things can be flexible in

164 China if you find the right way; by negotiating with Chinese suppliers and partners, it is possible to obtain better offers.

7.2 Taiwanese DC Firms’ Strategies in China

In this section, I will discuss the second research question: What strategies have Taiwanese digital content firms adopted to compete in the Chinese market?

As I discussed in chapter two, entrepreneurial strategies can be divided into overall strategies, business strategies, and functional strategies. Business strategies are the responsibility of the strategic business unit (SBU); these mainly make medium-sized decisions, such as competitive strategies. Most SMEs do not have many administrative levels; therefore business strategies are sometimes equivalent to overall strategies.

Business Strategies in China

This study has adopted Schuler and Jackson’s classification (1987) that uses cost-reduction, innovation, and quality-enhancement to examine DC companies’ entrepreneurial business strategies.

According to Schuler and Jackson (1987), cost-reduction strategy involves enhancing competitiveness by lowering the prices of products or services. As I discussed in chapter five, because of the labour-intensive nature of animation, Wang Film has used cost-reduction business strategies. Furthermore, it has enhanced production efficiency and reduced expenditures by setting up a branch in Suzhou. In addition, it has re-engineered production processes through partnership with Huqiu Technical Art School and animation satellite factories’ system. Therefore, Wang Film can sell its animation services at a lower price in the international market.

Artkey and CnYES both emphasize the development of products or services that are unique or different from those of competitors. These are innovation strategies . Artkey also uses

165 cost-reduction strategies. It obtains low-cost artwork licenses in China, which are then sold to the Western markets. Artkey can acquire significant profits from the different levels of economic systems.

Somode and iPartment demonstrate a mixture of innovation and quality-enhancement strategies . They both create unique products and services, such as Somode’s new flash format and iPartment’s Web 2.0 and Avatar. However, they also face challenges from local Chinese companies. Therefore, the most important business strategies are quality-enhancement strategies. They both offer a high standard of quality DC products or services. The difference is Somode focuses on the content quality while iPartment emphasizes customer services. Somode’s income is mainly from advertisers. Most of iPartment’s profits come from paid users, thus it regularly changes its content and services according to users’ suggestions.

Functional Strategies in China

As I mentioned in chapter two, functional strategies are small-scale strategies of marketing, financial affairs, production, human resources, etc. After examining entrepreneurial functional strategies in China, I divided them into four categories: product, marketing, resource acquirement, and organizational restructuring strategies.

Re-examining Digital Content Products

Product strategies include market innovation (CnYES’s Taison.Com, iPartment’s white-collar, female market), concept innovation (Artkey’s art licensing, CnYES’s E-Commerce), and technological innovation (Somode’s e-magazine).

The ‘core ’ digital content products and services are computer animation (Wang Film), network services (CnYES, iPartment), E-publishing and digital archiving (Artkey, Somode) 52 .

52 They also produce other ‘core’ digital content products. For example, Wang Film produces E-learning

166 Most digital content companies produce ‘non-core ancillary ’ products and services. In the cases investigated here they include publications and literature (Wang Film, Artkey, Somode, and iPartment), motion pictures and videos (Wang Film, Somode), radio and television (Wang Film), software and databases (Wang Film, CnYES), visual and graphic art (Artkey), advertising services (Somode), and copyright collective management societies (Artkey).

‘Related ’ products and services expand the range from media-based into pan-art and cultural goods, such as various topic tours and branded services. The five digital content firms also produce ‘sub-associated’ digital content products, including new online products (CnYES, Somode, iPartment), new embodied products (Wang Film, Artkey, CnYES), traditional products (Wang Film, Artkey, Somode, iPartment), and creative industries support products and services (Artkey, Somode).

The three levels of digital content products in this model do not exclude each other, and sometimes there the boundaries are not clear. Actually, the different levels obtain support from each other leading to better results. Superior content is always the base of horizontal integration of products and services in digital content industries. This model not only divides digital content products into core, non-core ancillary and related, but also describes the relationships and synergies between digital content industries, content industries, and creative industries. In addition, it is also a good model to inspire digital content industries with unlimited possibilities. Digital content industries seem to be ICT-based; however, they can employ creativity from traditional industries. Digital technology is the best medium between old and new media and eventually digital technology will produce more convergence in these industries.

Marketing Strategies

The marketing strategies of digital content industries in China have three targets: end-users, advertisers and industries. According to traditional business concepts, marketing strategies courses (E-learning), flash animation utilised in mobile phones (mobile application service) and Internet (network services). Except for network services, CnYES provides E-learning, digital audio/ visual applications, mobile application services, content processing software, and E-publishing and digital archiving products.

167 include product, price, place, and promotion (4Ps). Because digital content products have significant uniqueness from other media products, I therefore isolate the product strategy. Digital content products are characterised by ‘media dualism’. This refers to the fact that media’s ‘clients’ are not only advertisers, but also audiences. Media obtains high profits from advertisers when it attracts larger audiences. Digital content products also possess this feature that can acquire significant income from audiences or end users directly, for example, iPartment and CnYES’s subscriber fees and Wang Film’s revenue from box office. Some digital content companies such as Somode, iPartment, also provide a marketing channel for advertisers. These two kinds of marketing innovations are usually small-scale, continuous, interactive and customized.

The last marketing targets of Taiwanese digital content firms in China are industries, such as TV stations (Wang Film’s CCTV strategy), agencies (Artkey’s LIMA strategy), and industries (Artkey). That kind of B2B model is evident in off-line digital content industries, such as animation and art licensing. In order to conduct effective marketing, localization and guanxi are very important factors in doing business in China.

Resource Acquisition Strategies

China is a resource rich country. Some digital content companies employ resource acquisition strategies. The chief resources Taiwanese firms want to obtain are labour and culturally symbolic materials.

As mentioned in chapter five, Wang Film has adopted two labour-related entrepreneurial strategies. The first is a partnership with Huqiu Technical Art School. Wang Film selects potential staff in Huqiu Technical Art School to provide one year in-school training and a half-year on-site training after the students graduate. When these students pass the 1.5 years trial period, they usually can formally become staff of Wang Film. This strategy makes Wang Film’s human resource system efficient. The second is its animation satellite ‘factories’ strategy. As I have discussed in chapter five ‘factory’ refers to small-scale animation studios that help Wang Film to produce some animation projects, to reduce fixed

168 costs and exploit flexible human resources. Wang Film has become an intermediary in handling the entire production process between contracted animation firms and the animation ‘factories’.

Artkey regards artwork-license acquisition as its main strategy in China. Resource acquisition strategies have only been adopted in off-line digital content companies.

Organizational Restructuring Strategies

Another strategy only employed by web-based digital content companies is the organizational restructuring strategy. Organizational restructuring strategies occur when a company restructures its organization via management buyout or tries to the change market structure by introducing venture capital. There are two examples of such strategies in this study, namely Somode and iPartment.

In China, capital is one of the major challenges for new ventures. Chinese commercial banks have many regulations than other countries. According to the Chinese Financial Yearbook (1989-1999, cited in Cooper and Yin 2006), only 0.03 percent of loans were granted to private companies by state-owned banks in 1998.

Some entrepreneurial strategies are a mix that is difficult to define. For example, Artkey’s Olympic strategy is a both a marketing strategy and a resource acquisition strategy.

In conclusion, Taiwanese digital content companies mainly adopt product, marketing, resource acquisition, and organization restructure strategies in China. The detailed functional strategies of the five cases in this study are shown below.

Wang Film Artkey CnYES Somode iPartment Product - ‧ Art licensing ‧ E-Commerce ‧New Format ‧ White-collar and itself ‧ Tai-son.Com E-magazines girl strategies ‧ Web 2.0 Marketing ‧ Partner with ‧ Beijing Olympic ‧ E-Commerce ‧New Format ‧ Web 2.0 CCTV Games ‧ Tai-son.Com Advertisements ‧ Customized ‧ Self-production ‧ Participate in ‧ Synergy advertisements Film ‘Fire Ball ’ Art exhibition

169 ‧ Combination with Internet Resource ‧ Partner with ‧ Acquire licenses - - - Acquisition Huqiu in China ‧ Animation ‧ Beijing Olympic Satellite Games Factories Organizational - - - ‧Management ‧Venture capital (VC) Restructuring buyout and VC Table 7.1: Five Cases’ Functional Strategies Source: Compiled by Researcher for this Study

The Evolution of Strategies

Aldrich and Zimmer (1990) state entrepreneurship is a dynamic process. In addition, entrepreneurship requires relations between key components of the process. In this study I found out there are significant differences in the evolution of strategies between two types of digital content firms: off-line firms whose products are produced in more traditional formats (chapter four: Wang Film and Artkey) and companies whose operations are predominantly web-based (chapter five: CnYES, Somode and iPartment).

Off-line digital content firms usually adopted ‘resource acquisition strategies’ in the first stages. For instance, Suzhou Wang Film sought out cheaper, better quality employees in China from 1997 to 2002, including partnering with Huqiu and Animation Satellite Factories. Artkey also adopted art licenses acquisition and promotion as its first step from 2000 to 2007.

In the second stage, off-line digital content firms adopted ‘marketing strategies’ focused on the market and client expansion. For example, Wang Film built a partnership with CCTV and imported the in-house production series Fire Ball from Taiwan into China from 2002 until 2007. Artkey participated in international art exhibitions and combined the Internet to reach potential markets from 2001 to 2007. In addition, Artkey launched another market development strategy from 2005 to 2008 that focused on the Beijing Olympic Games.

The transition of strategies among off-line digital content firms in China is as follows: the first stage sees firms undergoing an initial period of uncertainty before establishing some

170 kind of presence in China. After this period they often search out other business resources or market opportunities outside China, and try to maximize profits through exporting or consolidating/integrating resources in China. Another more efficient factor used by off-line firms is to establish official guanxi to foster secure opportunities to enter local markets. Wang Film cooperated with CCTV and Artkey partnered with Humanistic Olympic Studies Center Renmin University of China (HOSC).

By comparison, none of web-based digital content companies deployed ‘resource acquisition strategies’. They usually employed both product and marketing strategies in the beginning. For instance, the first stage of CnYES was building the financial brand in China, and from 2000 until now it has been developing its E-Commerce business. In its initial stage from 2003 to 2007, Somode created the new format of e-magazines and advertisements. The first phase of iPartment from 2005 to 2007 was to cultivate users and obtain a niche market in China.

The next phase of strategies of Taiwanese online media focuses on innovation in product and marketing. For example, from 2005 to 2007 CnYES created another new website product, Tai-son.Com, and increased cooperation with three websites among CnYES resulting in synergy. From 2006 to 2007 iPartment brought in the concept of Web 2.0 and customized its advertisements.

The key factors in the transition of the above two strategies are in-house innovation and partnership. The ‘organizational restructuring strategies’ in the final stage requests digital content companies with some qualifications to attract venture capital, such as stable income and future potential. Somode and iPartment are two cases, which adopted this strategy: Somode restructured the company via operating a management buyout and introducing venture capital from 2007 to 2008. iPartment also introduced venture capital into China’s branch in the final stage.

171 Taxonomy Matrix of Entrepreneurial Strategies

Entrepreneurship is a process of value creation. The scope of value varies; it could be quite big, and possibly very little. Bruyat and Julien (2000) have proposed four archetypical entrepreneurial I-NVC (Individual-New Value Creation) dialogics to describe the different importance of the economic environment and individuals. These are entrepreneurial reproduction, entrepreneurial imitation, entrepreneurial valorization and entrepreneurial venture. In comparison with the entrepreneurial strategies classified by function, I argue the digital content industries’ entrepreneurial strategies can be classified by different intensities in strategies.

The ‘taxonomy matrix of entrepreneurial strategies’ that I propose has two dimensions: the level of innovation and the level of firms’ resources for strategy (see Figure7.1).

The Level of Innovation Firms’of Level The Resources High Type 3 Type 1 Conservative Effective

Type 4 Type 2 Impoverished Bounded

Low High

Figure 7.1: The Taxonomy of Entrepreneurial Strategies Source: Compiled by Researcher for this Study

‘The level of innovation’ can be differentiated between radical, discontinuous and incremental (continuous) innovation. Type 1 and Type 2 firms represent aggressive entrepreneurial strategies. Type 3 and Type 4 can be viewed as defensive entrepreneurial strategies.

Lyrette (2002, 93) argues that innovation is far more than just R&D. It should take into account the social, organizational, market and financial factors on which most new products

172 and economic growth are based. Furthermore Quintas (2002, 138) says that the management of innovation is associated with the management of knowledge capabilities as well as resources - the process of creation, reformulation, sharing and bringing together of different types of knowledge (Quintas 2002, 138). Technological or format innovation in DC companies can be viewed as hard innovation (radical innovation). Content innovation can be viewed as soft innovation (incremental innovation).

Is innovation valuable? And in what circumstances does it become redundant? Some firms are innovative, even in just entering the market. However, due to the limitations of a firm’s resources, not every innovation, activity, or strategy is successful, especially for international companies. In my study, most Taiwanese digital content firms have a measure of success in Taiwan. Nevertheless, they do not have enough resources in everyday real operations in the host country (P.R.C.). CnYES’s e-commerce business is a case in point: they operated well in Taiwan, but they cannot be termed ‘successful’ in China because of the lack of strong local financial partners.

Miller (1988, 282) argued that neither strategies nor structures alone, nor a suitable match would be adequate to ensure good performance. Innovative strategies will fail unless they address an environment that values novelty and is accompanied by a structure that can produce it. Similarly, Mathews (2006) refers to the idea of ‘competence bloc’. I identify the ‘structure’ that Miller mentions as one kind of ‘resource’. The main object of digital content firms is to match the evolution of resources and link these to a successful leverage of internal capabilities, what Mathews calls ‘routines’ (I will discuss the resource-based view later in relation to guanxi ).

The level of firms’ resources represents the resource situation in each strategy. As I discussed above, the entrepreneurial strategies could be divided by different functions. The resources of DC firms depend on different functions and periods. Therefore, this Taxonomy Matrix of Entrepreneurial Strategies is a dynamic system. An entrepreneurial strategy can transfer from Type 2 (Bounded) to Type 1 (Effective), when the DC firm increases its resources. It also can transfer from Type 3 (Conservative) to Type 1 (Effective) after the firm

173 polishes up its innovation strategies. Resource movement is at the base of the evolution of economic systems, especially international DC firms. When international DC firms establish a new branch in another country, resources such as technology and know how from the headquarters are also important resources for subsidiaries.

When a firm’s resources match the resource requirements of its innovation plans, it can create Type 1 (Effective) strategies. When a firm has a great innovation plan but has poor resources, it only can create Type 2 (Bounded) entrepreneurial strategies. Type 3 (Conservative) entrepreneurial strategies represent the firms that just adopt low-level innovation although they might have enough resources. Even though Type 3 strategies can match the firm’s resources and innovation plan, we cannot say it is not a successful strategy. However, the intensity of the DC firm’s entrepreneurial strategy needs to improve. Type 4 is termed ‘impoverished’. It represents a strategy, which has neither a developed innovation plan nor sufficient resources.

The result of the intensity of these entrepreneurial strategies can be adduced from ‘The level of environmental effect of entrepreneurial strategies’. It represents the value creation results of entrepreneurial strategies. If one entrepreneurial strategy can cause a higher-level environmental effect, that means this strategy has high impact on other companies among the same industries. This kind of strategy tends towards disruptive or radical innovation. This situation usually allows the firm to become the leader of an industry. According to innovation diffusion theory, the firm that adopts disruptive or radical innovations is an early adopter, not a follower.

I therefore make a summary of the five Taiwanese DC companies’ entrepreneurial strategies according to the model of ‘taxonomy matrix of entrepreneurial strategies’ I have proposed (see Figure 7.2). The results are below. Most entrepreneurial strategies are located in Type 3 (Conservative) and reflect the features of Taiwanese entrepreneurship that I discussed in chapter four. There are however many entrepreneurial strategies in Type 1 (Effective) and many firms have actually become leading companies in their representative industry, such as Artkey, Somode and iPartment.

174

None of the Taiwanese DC firms operate Type 4 (Impoverished) entrepreneurial strategies. These DC firms have succeeded in Taiwan and they at least can obtain some existing resources or innovation plans from their headquarters. Two entrepreneurial strategies are bounded. As I discussed in chapter five Wang Film suffered difficulties in Original Brand Manufacturing (OBM). As I also discussed in chapter six CnYES missed an opportunity in the beginning period of the Shanghai-Shenzhen market share because of an insufficiency of human resources.

The Level of Innovation High

The Level of Firmsof Level The Type 3 Conservative Type 1 Effective

Animation Satellite Factories, Partner with Art License (Artkey) Huqiu, CCTV (Wang Film) Taison.Com (CnYES) Beijing Olympic Games, Art Exhibition, Flash Format (Somode) Girl Strategies, Web 2.0 (Sunfun) Combination with Internet (Artkey) Customized Advertisement (Somode, Capital Venture (Somode, Sunfun) Sunfun)

’ Type 4 Impoverished Type 2 Bounded

Resource OBM Animation Films (Wang Film) - Financial E-Commerce (CnYES)

s

Low High

Figure 7.2: The Application of ‘Taxonomy of Entrepreneurial Strategies’ Source: Compiled by Researcher for this Study

7.3 Entrepreneurial Guanxi

In order to respond to the third sub-questions in this study: How significant is the role of business practices such as guanxi to Taiwanese business success in Mainland China? I pay particular attention to the questions of cultural proximity and discuss the term entrepreneurial guanxi . I also investigate this in the light of my findings of different orders in Chinese society. Then I build a ‘Taxonomy Matrix of Entrepreneurial Guanxi ’, and examine the dynamic process between entrepreneurship, entrepreneurial strategies and entrepreneurial guanxi . According to my findings, this study supports the distinctive business practice such as guanxi is important to Taiwanese business and to relations with

175 Mainland China. In addition, the use of guanxi relationships by Taiwanese entrepreneurs has provided a competitive advantage in entering the Chinese digital content market. However, how long this advantage will last, however, is a question for further analysis.

Cultural Proximity

As mentioned in chapter two, cultural proximity can be seen as one of the competitive advantages Taiwanese digital content firms have in the Chinese market. It can be shown in several ways, including better guanxi than competitors and a deeper understanding of cultural contexts.

Language has been stated as an important determinant of investment in China by many scholars (Mathew, Krishnamurti and Sevic 2005; Geib 2005). Mathew, Krishnamurti and Sevic (2005) have confirmed the proficiency of the Chinese language is positively related to the advantages of four critical factors in China, namely culture, guanxi , negotiation and communication. According to the result of Dou and Clark’s study (1999), language difference was ranked the most significant difficulty by North American business executives. Taiwan and China have the same official language ‘Mandarin’, some Taiwanese entrepreneurs can also speak Cantonese and Fukienese. Most interviewees of my study mentioned that having the same language assists in building guanxi , and maintains a sense of brotherhood with officials, providers and employees.

Several empirical studies have mentioned difficulties that foreign companies meet in China, such as cultural differences, strong competition, establishing a profitable service business, availability and education of Chinese workers and managers, and differing goals among collaborating partners (Gebauer 2007). Many scholars (Paik & Tung 1999, cited in Mathew, Krishnamurti and Sevic 2005; Chien 2006; Fernandez and Underwood 2006; Chung and Smith 2007) address the topic of ‘cultural difference’. Chien (2006) claimed the cultural differences between Western countries and China impact on leadership behavior, management systems, management effectiveness and ultimately, organizational performance in China. Fernandez and Underwood (2006) also describe the ‘disconnect’ in their study of

176 multinational firms, which met with Chinese officials, clients, customers and so on. ‘Cultural awareness’ (Chung and Smith 2007) is regarded as one of critical factors of success in doing business with the Chinese.

Some scholars (Kerr et. al. 1960; Levitt 1983, cited in Zhu, Quan and Kuang 2006) believe that modernization will lead to a common culture worldwide, especially via the Internet. However, some debate has arisen. Many scholars claim that people from different countries have their own distinct habits and tastes (Usunier 1996; Mooij 2004, cited in Zhu, Quan and Kuang 2006). Western digital content firms need to engage in a series of cross-cultural adaptation and product modification or they will be confronted with market challenges. Based on a survey with forty US-based Fortune 500 companies, Singh, Xhao and Hu (2003) reveal that the Internet is not a culturally neutral medium. In digital content environments, Western firms in China need to confront two kinds of translation, namely linguistic translation and cultural translation. Of these, cultural translation is more difficult. E-bay, the biggest online auction company in the world finished its business in China on December 2006 after five years of effort. Following this, Ebay paid $US 40million to acquire a 49 percent share of Tom.Com, a Hong Kong firm. A similar situation happened with Yahoo in August 2005. Alibaba.com merged with all the Chinese assets of Yahoo, including the Yahoo portal website (www.yahoo.com.cn), search website (www.yisou.com), online auction business (www.1pai.com.cn ), 3721 domain name service, Yahoo E-mail, and Yahoo Message. Other noticeable Western websites, such as Google 53 and Amazon also face strong competition in the Chinese market. These examples illustrate how difficult it can be for Western firms entering Chinese market.

The example of News Media Group shows that even a huge media group still faces many obstacles in the Chinese market. In 1993, Murdoch acquired Star TV from Li Jia-Cheng as a means of consolidating in the Chinese market. Murdoch was forced to compromise in many activities and ingratiate himself to Chinese leaders; he removed BBC programs from Star TV and published the book My Father Deng Xiaoping in an English edition. In 1995,

53 According to CNNIC, just 14.3% of Chinese choose Google as most favorable search website, while Baidu acquired 74.5% Chinese support on September 2007.

177 Murdoch appointed Chinese managers. He even married a Chinese native, Wendy Deng, which some have suggested was a strategic move. After significant effort, in March 2002 Starry Skies Channel ( xingkong weishi ), the first ‘pure’ foreign TV channel, received broadcast rights in China, that is, the right to broadcast Mandarin language programs in Guangdong Province. Although Starry Skies Channel broadcast several popular programs, such as ‘BeautyGate’, ‘Starry Skies Dream Factory’, ‘Starry Skies Surpass Maximum’, it is still struggling in China (Cao 2003).

Guanxi

Organizational scholars Nahapiet and Ghoshal (1998, cited in Kumar and Worm 2003, 265) have proposed that the cognitive dimension of social capital focuses on the degree of shared understandings attained through the use of similar frameworks. Mutual understanding of each other’s goals, similarity in persuasive styles and communicative effectiveness are very important for international companies doing business in China.

As I discussed in chapter two, networks and guanxi can be viewed as a kind of social capital (see Figure 7.3). Networks are embedded in business theories, whereas guanxi is embedded in Confucian philosophy, mainly in Pan-Chinese society. Networks and guanxi overlap in some part when guanxi is practiced in the field of business. Another concept known as ‘relationship marketing’ is found in network theory and this has some overlap with guanxi.

178

Social Capital

Networks Guanxi

Relationship Marketing

Entrepreneurial Guanxi Entrepreneurial Guanxi

Figure 7.3: The Relationship between Entrepreneurial Guanxi with Other Theories Source: Compiled by Researcher for this Study

Entrepreneurial guanxi is a form of networking as well as having its base in ‘traditional’ guanxi . I further define the concept of entrepreneurial guanxi :

Entrepreneurial guanxi refers to special relationships, contains implicit mutual obligation, assurance and understanding to secure, exchange favours among entrepreneurial activities.

All interviewees identified entrepreneurial guanxi as very important in China, especially official guanxi . However, there were different opinions. More interviewees regarded entrepreneurial guanxi as a factor in Chinese societies, including China and Taiwan. Alex Guo of Artkey, Cheng Yiwei of Somode and Yang Chih-Hung from Ming Chuan University believe guanxi is more important in Chinese societies. It is not usual practice internationally to engage in social activities, such as business meals. However, it is normal in China, especially in Beijing.

Entrepreneurial guanxi and guanxi share a lot of common elements. Guanxi itself is identified as emerging from Confucian interpersonal kinship and clan systems.

179 Entrepreneurial guanxi is where socially embedded forms of kin and clan are utilised for business advantages. Both forms embody competitive advantage, success factors and market variables. Mianzi (face) and renqing (favour) are associated intangible forms of social currency, personal status, and are key components in the dynamic of entrepreneurial guanxi . Gift giving and holding banquets are two frequently used tactics in building entrepreneurial guanxi .

Entrepreneurial guanxi and guanxi have other similar features. First, entrepreneurial guanxi is transferable. If B has entrepreneurial guanxi with A and C, B can introduce or recommend A to C or vice versa. Second, entrepreneurial guanxi is reciprocal. Entrepreneurial guanxi relationships that are no longer profitable or based on equal exchanges are easily broken. In this sense entrepreneurial guanxi is costly: to create, assemble, transmit, receive, understand, use and store. Third, entrepreneurial guanxi is intangible. It is established with exchange of favours and maintained in a long run by unspoken commitment to others in the relationship web. Entrepreneurial guanxi can be viewed as a kind of ‘intangible asset’, even ‘guanxi capital’. Fourth, entrepreneurial guanxi is utilitarian rather than emotional. Fifth, entrepreneurial guanxi is also personal. An organization’s guanxi is established and maintained by individuals (Luo 1997).

Three main theories associated with guanxi , as well as entrepreneurial guanxi , are transaction cost, resource-based and social capital theories. In Western transaction cost analysis, guanxi forms because firms tend to minimise transaction costs: ‘bounded rationality’, uncertainty about the future, the presence of a small number of players for a given kind of transaction, and the possibility of opportunistic behaviour on the part of some of the players. A resource-based view of a firm examines a company’s strengths and weaknesses through analysing its resources (assets), including financial, physical, human and organizational categories. In this framework, guanxi could be viewed as a firm’s human capital as well as a competitive advantage (Tsang 1998). According to Carlisle, Flynn (2005), social capital is an attempt to enlist others in uncertain environment. Guanxi , as a kind of social capital, is created by social relations that organize people and facilitate activities to obtain benefits such as earning more income.

180

In addition, in comparison with Western entrepreneurial networks, entrepreneurial guanxi has Chinese characteristics: First, Confucianism determines that individuals are part of a system of interdependent relationships. The ‘five hierarchical relationships’ system includes five types of relationship such as ruler-subject, father-son, husband-wife, brother-brother, and friend-friend. A person should take responsibility for his given role. Second, in the context of Confucianism, governance by ethics, at least inter-group rules is preferred than law. This view differs from relationship governance in the West. The concept of group orientation also impacts on relationships. Third, favours exchanged in guanxi networks not only happen in commercial activities, but also in social situations and involve mianzi (face) and renqing (favour). Finally, guanxi dominates daily life in Pan-China society more so than networks do in Western countries.

As mentioned earlier, both the RARE framework (Mathews 2006) and Miller’s three dimensions of firm-level entrepreneurship emphasise identifying and evaluating opportunities and resources required. Entrepreneurial guanxi increases the possibility that people will discover entrepreneurial opportunities (Hitt, Ireland, Camp, and Sexton 2001) and provide resources and capabilities which firms need (Hitt, Ireland, Camp, and Sexton 2001, 408). Entrepreneurial guanxi is important to new venture firms especially because of their limited resources (Hitt, Ireland, Camp, and Sexton 2001). In ‘evaluating opportunities’, entrepreneurial guanxi can provide firms with the means to access information, markets and even technologies. Hub firms with entrepreneurial guanxi may become a focus of innovation and R&D.

Entrepreneurs with broader and more diverse entrepreneurial guanxi have better access to financial resources, develop stronger ties to customers and suppliers, and hire people with better skills (Hansen and Allen 1992; Bruderl and Preisendorfer 1998; Shane 2003, 93). This correlates with Mathews’ notion of resources determining activities and routines (2006). Cooper (2002) notes that entrepreneurial firms often deal with great uncertainty, such as new technologies, markets, management teams and untested strategies. A firm does need not to own all the assets it utilizes; it can assemble resources in various ways. Entrepreneurial

181 guanxi can decrease the need for capital as the entrepreneur borrows space or obtains the use of excess resources from other firms (Starr and MacMillan 1990, cited in Cooper and Yin 2006, 84). Entrepreneurial guanxi is therefore an important tool to assemble resources in Pan-China society.

Bob Deyou of CnYES and Edwin W.K. Lo from the Chinese Culture University (2007 Interview: 20 Mar) believe that opportunity assessment and resource explorations are heavily impacted by entrepreneurial guanxi . For instance, Shanghai CnYES owns lots of exclusive businesses, including industry park developments, real estate, and local junior and high school agency businesses. These institutions are all part of the entrepreneurial guanxi of Shanghai CnYES.

Taiwanese DC firms have also established entrepreneurial guanxi via joining local and national organizations to exchange industrial information and develop cooperation opportunities. Bonny Hu, the Shanghai president of CnYES (2007 Interview: 5 Jan) regularly dines with Taiwanese businessmen. They share industrial, political, and lifestyle information (evaluating opportunities). This leads to cooperation and business deals (i.e. resources required). Jamy Lin, one of the founders and vice-CEO of iPartment (2007 Interview: 14 Feb) built guanxi with EZpeer, and Gamania. Wang Film, other Taiwanese DC firms, in the initial stages (George Chang, the Suzhou’s president of Wang Film 2007 Interview: 12 Jan) and continues to occasionally participate in the Suzhou Taiwanese Association. Most Taiwanese entrepreneurs participate in Taiwanese associations to make friends and exchange business information. However, the main business of Wang Films is well established so it is not essential to participate in these activities. Here Wang Film is a case of Entrepreneurial Guanxi Unfulfilled (I will discuss this in the next section).

Taxonomy Matrix of Entrepreneurial Guanxi

Both network structure and network qualities are important dimensions of social capital (Coleman 1990, Nahapiet and Ghoshal 1998, cited in Vissa and Chacar 2006). Following this argument, I propose the ‘Entrepreneurial Guanxi Taxonomy Matrix’. This has two

182 dimensions: ‘Association, Benefit’ (structure) and ‘Trust, Reciprocity’ (qualities) to represent four different types of entrepreneurial guanxi .

‘Association, benefit’ represents a kind of guanxi structure, the objective relationship between individuals. Association refers to the intensity of guanxi . As I will discuss below, the individual is in the centre while the association occupies different levels. Benefit implies advantages obtained from different entrepreneurial guanxi during the course of entrepreneurial activities.

‘Trust, reciprocity’ represents the qualities of guanxi , the subjective ties between individuals. Trust greatly reduces cost transactions. Those two factors create the goodwill and friendship embedded within human nature as in social capital theory, previously mentioned.

The four quadrants of ‘Entrepreneurial Guanxi Taxonomy Matrix’ are Strong (Quadrant 1), Unfulfilled (Quadrant 2), Aspiring (Quadrant 3) and Weak (Quadrant 4). Strong Guanxi (Quadrant 1) refers to the holder of entrepreneurial guanxi assets. It represents the entrepreneur who has well-established and secure relations. All Taiwanese DC entrepreneurs I discussed in chapter four and five belong to this type. For example, Shanghai CnYES developed the sole local schools agency business through building connections with the Human Resource Bureau and political commissars in the Shanghai Government.

Unfulfilled Guanxi (Quadrant 2) refers to the entrepreneur who has associations with people who can benefit his entrepreneurial activities. However, the entrepreneur has not maintained a good relationship with affiliated people (bad guanxi quality). The entrepreneur who has better opportunities to foster entrepreneurial guanxi but does not draw on these resources is identified as Unfulfilled Guanxi . An example is Wang Film, mentioned in the previous section.

Aspiring Guanxi (Quadrant 3) represents the entrepreneur who does not have strong connections with affiliated people or alternatively the guanxi he or she has can’t provide entrepreneurial benefits. However, this person still tries to build the quality of his or her

183 guanxi via trust and reciprocity. Aspiring Guanxi also can be viewed as ‘Potential’ Strong Guanxi . Two possible conditions exist in Quadrant 3: First, the Aspiring Guanxi entrepreneur has lower association and benefit from affiliated people. However, he or she keeps maintaining good quality of guanxi with affiliated people. The second point to note is that the Aspiring Guanxi entrepreneur does not have association with key people, those who are needed to assist his entrepreneurial activities. However, he still has a willingness to establish general guanxi with other people and generally has good guanxi quality. Conditions may change, however; for instance, when the Aspiring Guanxi entrepreneur becomes friends with affiliated people or someone transfers to a higher or closer position Aspiring Guanxi may become Strong Guanxi .

Weak Guanxi (Quadrant 4) represents the entrepreneur who occupies the lower, or has no entrepreneurial guanxi structure (association and benefit) and quality (trust and reciprocity). The subjective view of Weak Guanxi is similar to Unfulfilled Guanxi : They do not believe in the role entrepreneurial guanxi or may have negative opinions and thus do not have strong will to maintain guanxi . Weak Guanxi is therefore worse than Unfulfilled Guanxi , because there is lower connection with ‘affiliated people’.

We can locate the entrepreneurs into these four quadrants. However, single entrepreneurial guanxi are sometimes varied. Entrepreneurial guanxi is not static. Nevertheless, people who occupy the category Strong Guanxi find it easier to accumulate more entrepreneurial guanxi , and make more profit.

184

Association, Benefit between Individuals High Quadrant 3 Quadrant 1 Trust,Reciprocity between Individuals between

Aspiring Guanxi Strong Guanxi

Quadrant 4 Quadrant 2

Weak Guanxi Unfulfilled Guanxi

Low High

Figure 7.4: Entrepreneurial Guanxi Taxonomy Matrix Source: Compiled by Researcher for this Study

Association and Benefit

Fei (1948, cited in Chen 2005) coined the term chaxu geju (or different order) to describe the structure of Chinese society. He pointed out people have different positions in others’ minds. An individual has different predetermined relationship distances, as shown in Figure 7.5. The closer one is to the central person, the better guanxi he has with the central person. Wu lun (Five Cardinal Relations) is similar to chaxu geju. Hwang (1988 cited in Chen 2005) has a similar view of ‘differential order’.

Figure 7.5: Fei’s Different Order in Chinese Society Source: Fei (1948, cited in Chen 2005)

185 Hwang (1987, cited in Fan 2002) presented three types of guanxi: expressive ties, instrumental ties and mix ties as Figure 7.6.

Figure 7.6: The Mental Process of Resources Allocation Source: Hwang (2000, 169, cited in Chen 2005)

Fan (2002, 372) employed similar concepts to expressive ties and instrumental ties. He uses family guanxi and helper guanxi respectively. In addition, Fan proposed the term business guanxi to refer to the process of finding a business solution by using personal connections. Family guanxi, a special relationship, the expressive tie, is mostly blood based, while some are social based. The motivation of family guanxi is mutually dependent, emotion-driven and the core values are qinqing/affection, obligations, and empathy. Reciprocal need not necessary is altruistic. Generally, family guanxi is ethical, even desirable; however, some will result in nepotism. Helper guanxi is an instrumental / utilitarian process of exchange favours. The process of exchanging favours is ‘to get things done’. Business guanxi however is a purely utilitarian process of finding business solutions through personal connections. It is rooted in current political/economic structures in China, e.g. a weak legal system. The purpose of business guanxi is to overcome bureaucratic obstacles, to get special treatment or protection. Its quality and duration varies, and the downside is corruption and loss of social ethics (Fan 2002, 373).

This study adopts Tsang’s (1998, cited in Yi and Ellis 2000) two guanxi types to examine

186 entrepreneurial guanxi , called blood-based and social-based type. The blood-based guanxi includes family members, distant relatives, and even those people sharing the same surname. The social-based guanxi arises from social interactions at school, the workplace, or the locality.

According to Fei’s chaxu geju (or different order) structure, I argue that blood-based guanxi , especially family guanxi , has strong association with the individual. Thus blood-based guanxi can be viewed as one kind of important business guanxi in entrepreneurial activities as Figure 7.7.

Social-Based

Official Partner

Blood-Based Family Kinship Clan-like

Supplier Customer Employee Friends

Figure 7.7: The Different Order of Entrepreneurial Guanxi Source: Researcher compiled for this study

Blood-based Entrepreneurial Guanxi

Family is the basic building unit of Chinese society. The extended family is generally the most basic and stable unit of social organization in traditional society. It is the locus of all economic, political, social and religious life (Davis 1998). The kinship-oriented and clan-like network relationships, defined by Confucianism, are important in Pan-Chinese society.

Levinson (1998) stated that if the trust can be formed among family members, then financial support comes from the desires to develop new business ventures on behalf of the whole

187 family. Sometimes, family members also become the most important entrepreneurial supports for an entrepreneur. For example, the four founders of iPartment borrowed their first entrepreneurial funds from their families. Wang Toon 54 , the director of Fire Ball , is the younger brother of James Wang, the founder of Wang Film.

Social-based Entrepreneurial Guanxi

Besides blood-based entrepreneurial guanxi , entrepreneurs need to establish ‘brotherhood’ with other forms of social-based guanxi . Most scholars and interviewees divided these social-based guanxi into four kinds of associations: official guanxi (Peng and Luo 2000, 488; Pearce and Robinson 2000; Zhu 2007; Lee 2007), partner (Peng and Luo 2000, 488; Pearce and Robinson 2000; Galbreath 2002; Zhu 2007; Lee 2007), supplier (Peng and Luo 2000, 488; Galbreath 2002; Zhu 2007; Lee 2007), and customer (Pearce and Robinson 2000; Galbreath 2002; Lee 2007).

Li Ben-Qian (2007: Interview 25 Jan) mentioned the Chinese saying, ‘A tiny guanxi would determine success or failure.’ Even tiny guanxi can determine outcomes in China. Huge entrepreneurial guanxi that occurs between customers, suppliers, partners, and officials results in even more significant impacts. The supplier guanxi is mainly a kind of technological relationship related to hardware and technology. The foundation of partner guanxi depends on cultural communications, unanimous strategic direction, values, harmony and win-win outcomes. Official guanxi involves the political environment; official guanxi represents the view of a government or an organization. Comparatively speaking, there is a stronger tendency for ‘rule by men’ than ‘rule by law’ in China. Sometimes it is only necessary to persuade one or two key people.

Zhu Chun-Yang, a Lecturer of School of Journalism at Fudan University (2007 Interview: 24 Jan) further explains the four social-based entrepreneurial associations in China. The first,

54 Wang Toon has worked for Central Motion Picture Corporation for 32 years. Wang made his debut feature If I were for Real in 1980. His A Flower in the Raining Night was a box office success in 1983, the year Taiwan New Cinema is about to start. ‘ Run Away’ made in 1984 was a martial art film with a style of realism. Since then, Wang has focused his attention on the history of Taiwan. His trilogy of Taiwan history, Straw Man ,

188 customer relationships, allow the focal point of making better products. The second, partnership allows foreign firms to enter the Chinese market legally. Third, officials represent Chinese administrative power and offer safe ways to obtain resources, while also representing immature characteristics of the Chinese market. The fourth, supplier relationships can solve production problems.

Official Entrepreneurial Guanxi

Tsang’s study (1994, cited in Cooper and Yin 2006) found that close relationships with local governments are critical for the survival of private businesses in China and to ensure firms’ access to crucial raw materials and credit through state banks. Hsing (1998) stated that Chinese local governments have monopolized key economic resources like credit, land, foreign exchange and raw materials. They also possess regulatory authority in granting tax relief and issuing investment permits. For example, Alex Guo established entrepreneurial guanxi with Shanghai Creative Industries Centre, which presented Artkey’s exhibition at ‘The Window of Creativity’. Artkey not only enjoys the free decoration and rent in the exhibition of World Building, but also the most favorable tax policy in Shanghai (Guo 2007).

Bonny Hu, the Shanghai’s president of CnYES (2007 Interview: 5 Jan) says that she tried to establish entrepreneurial guanxi with Chinese officials, especially the officials of development zones in provincial and city government. After these efforts, Shanghai CnYES was able to negotiate with Chinese officials in a more reciprocal way; someone even jokingly called Shanghai CnYES the ‘Kuomintang service centre’. Somode has endeavoured to set up entrepreneurial guanxi with all official departments associated with the Internet, such as Copyright Office, Copyright Association, Publications Administration 55 , Ministry of Information Industry in State Council Office 56 , and the Internet Security Bureau in the Police Office (Internet Police). The Chinese government sometimes needs the Taiwanese

Banana Paradise and Hill of No Return were well accepted both critically and commercially. 55 Publications Administration is in charge of edition numbers. 56 The role of Ministry of Information Industry in State Council Office is similar with CPC Propaganda Department. It formulates Internet policies and is in charge of related businesses.

189 government’s documents or regulations for reference or to solicit Taiwanese DC firms’ opinion. In this way Somode can be indirectly involved in some DC policy legislation (Cheng 2007). According to Jamy Lin of iPartment, his company has established some official guanxi . It has no regular dinner parties, but still participates in some annual meetings in order to know more people.

One interviewee confirmed that sometimes very important entrepreneurial guanxi resides with one or two key men. He provided a short story of his company to illustrate this. He built guanxi with a low level official in charge of content examination of DCI after a business contact. After they became good friends the official received a letter of accusation about the DC firm’s content. The officer adopted the attitude, ‘put the letter on ice’. Actually the official did not require covert payment, sometimes they would chat, exchange presents, have a meal, and help with some small things such as borrowing a car, helping the official’s relative household register, and so on. That demonstrates a Chinese saying, ‘You do not need to be afraid of the county magistrate, but you should be afraid of the person who is in charge of your business in the county’

Official guanxi is relatively more important than other entrepreneurial guanxi for digital content firms in China. Guo (2007), Lo (2007) and Yang (2007) believe that because China is not a democracy, a lot of executives in state-owned enterprises have official experience. Chinese official guanxi is very important as officials can control human and capital resources (Yang 2007).

Comparing China and Taiwan, Claire Hsu, a section manager of the Institute for Information Industry (2007 Interview: 16 Mar) and Yang (2007) believes official guanxi is less important in Taiwan.

Partner and Supplier Entrepreneurial Guanxi

Many scholars have mentioned the importance of partner and supplier entrepreneurial guanxi . Hagedoorn (1993, cited in Anderson, McNiven and Rose 2002, 48) proposed that

190 motives of strategic alliances are capturing the capabilities, knowledge, technologies and market. Anderson, McNiven and Rose (2002, 61) also pointed out the main purposes of collaborative arrangements include conducting R&D, regulatory affairs, access to knowledge, prototype development, access to markets, access to capital, and intellectual property protection. In addition, building good relationships with executives at competitor firms may facilitate inter-firm cooperation, or provide chances to reduce transaction costs within companies (Peng and Luo 2000, 488). If entrepreneurs have embedded relationships, suppliers may be more willing to give preferred treatment, detailed information, or work jointly to solve problems (Uzzi 1997, cited in Cooper and Yin 2006, 84).

Young firms also can obtain benefit through establishing cooperation with well-respected firms (Stuart et al. 1999, cited in Cooper and Yin 2006, 84). Deyou (2007) stated that cooperation with local media and websites is important in Chinese DCI. Shanghai CnYES has accumulated 60~70 partners such as Sina and Sohu to cooperate in content and exchange advertising. The Planning Department of Shanghai CnYes is in charge of local strategic alliances. Deyou, who has a traditional media background, is in charge of cooperative partners in news, such as ET Today, Central Broadcasting Radio, and Hong Kong’s media Caihua Suffix. CnYES invested more than US$3.07 million in advertising its initial stage. CnYES has ten magazines that adopt advertising exchanges at present. Lin (2007) also believes cooperation with local media is the core partnership of iPartment.

Huang Chungkuang, a manager of Digital Content Industry Program Office of Economic Affairs (2007 Interview: 20 Mar) also believes supplier entrepreneurial guanxi is important in DCI. He stated DC firms could authorize small-scale operating studios as suppliers to advance the flexibility of DCI. As I discussed in chapter five, Wang Film also adopts this strategy in China.

Because human resources are a significant element in creative industries, I argue employee guanxi can be viewed as one kind of supplier guanxi . For example, many of Wang Film’s senior managers graduated from Department of Information and Library Science, Tamkang University, including the founder James Wang. Fernandez and Underwood (2006, 56)

191 believe strong employer-employee guanxi is the key factor in creating committed and loyal employees in China.

Customer Entrepreneurial Guanxi

Customer entrepreneurial guanxi has received attention in China and Taiwan in the past five years (Lo 2007; Hsu 2007). Its benefits are increased customer loyalty, increased sales volume, and reliable payments.

According to Deyou (2007), CnYES adopts a gradual progress in customer relationship management (CRM), which assists target advertisers in holding investment lectures and provides assistance with voluntary cross-media promotions. This kind of customer service is similar with the concept of integrated marketing communication (IMC) and has produced great performance. Hu (2007) said she takes a passive approach in setting up customer guanxi . Some people contact with her voluntarily through the CnYES website, while some have been introduced by local customers, real estate firms, and schools. iPartment (Lin 2007) has mainly built customer relationships through PR events and media.

The Dynamic Process between Entrepreneurship, Strategies and Guanxi

Entrepreneurship, entrepreneurial strategies, and entrepreneurial guanxi are dynamic processes. After examining dynamic relationships between entrepreneurship, entrepreneurial strategies and entrepreneurial guanxi, I now propose two dynamic models: the Entrepreneurial Guanxi Pursuit Model and the Entrepreneurial Guanxi Decision Model.

The Entrepreneurial Guanxi Pursuit Model refers to how the entrepreneur creates entrepreneurship or entrepreneurial strategy in advance, and then exploits entrepreneurial guanxi as a resource. The Entrepreneurial Guanxi Pursuit Model consists of EGS (Entrepreneurship
Entrepreneurial Guanxi
Entrepreneurial Strategies) and ESG (Entrepreneurship
Entrepreneurial Strategies
Entrepreneurial Guanxi ) patterns.

The Entrepreneurial Guanxi Decision Model represents how entrepreneurship or strategy is

192 created due to entrepreneurial guanxi . The Entrepreneurial Guanxi Decision Model consists of GES (Entrepreneurial Guanxi
Entrepreneurship
Entrepreneurial Strategies) and GSE (Entrepreneurial Guanxi
Entrepreneurial Strategies
Entrepreneurship). For example, James Wang set up the entrepreneurial guanxi with Hanna-Barbera first, and then established Wang Film.

The most dynamic process between entrepreneurship, entrepreneurial strategies, and entrepreneurial guanxi entrepreneurial in this study belongs to the Entrepreneurial Guanxi Pursuit Model. However, the Entrepreneurial Guanxi Decision Model usually allows more benefits because of the intensity of entrepreneurial guanxi , for example Artkey’s Beijing Olympic Game business.

7.4 Conclusion

In conclusion, I identified three main kinds of business strategies (cost-reduction, innovation, and quality-enhancement strategies) and four categories of functional strategies (product, marketing, resource acquisition, and organizational restructuring strategies). I found significant differences in the evolution of entrepreneurial strategies between two types of digital content firms. Off-line firms’ products are produced in more traditional formats. Off-line firms usually adopted the ‘resource acquisition entrepreneurial strategies’ in the initial stages followed by ‘marketing entrepreneurial strategies’. Those companies whose operations are predominantly web-based mainly adopted product and marketing entrepreneurial strategies in the beginning and innovation of product and marketing in succeeding stages. Two of them also adopted organizational restructuring strategies in the final stage.

I have proposed the ‘Taxonomy Matrix of Entrepreneurial Strategies’ employing two dimensions: the level of innovation and the level of firm’s resource, and divided this into four cells called Effective, Bounded, Conservative and Impoverished.

I then explored in depth the concept of ‘entrepreneurial guanxi ’, referring to special

193 relationships, which contain implicit mutual obligations, assurances and understandings, and the exchange of favours among entrepreneurial activities. I drew up the ‘Entrepreneurial Guanxi Taxonomy Matrix’ with two dimensions: ‘Association, Benefit’ (structure) and ‘Trust, Reciprocity’ (qualities) and divided this into four different types of entrepreneurial guanxi : Strong (Quadrant 1), Unfulfilled (Quadrant 2), Aspiring (Quadrant 3) and Weak (Quadrant 4). This discussion examined the dynamic process between entrepreneurship, entrepreneurial strategies and entrepreneurial guanxi . Finally I introduced two chief dynamic models: Entrepreneurial Guanxi Pursuit Model and Entrepreneurial Guanxi Decision Model.

194 Chapter 8

8.1 Conclusion

The aim of this thesis has been to understand the conduct of Taiwanese digital content firms in managing their international entry strategies into the Chinese market. My selection of the topics discussed in this thesis was driven by four concerns. First, the market-opening effect of China’s accession to the WTO has greatly enhanced global interest in investment in the Chinese market. In addition, the business society of Taiwan becomes increasingly dependent on China for production and market development. Second, this study focuses on the East Asia region, collectively an important emerging ‘digital economy’. Third, in contrast with many past SMEs researches, this study emphasizes the pan-Chinese societies, whose characteristics are higher average levels of savings than Western societies, where it is much more common for people to acquire personal debt and rely upon governments for provision of basic service. In particular, Taiwan and China are culturally proximate, but often have different structural relations among firms. Fourth, Zahra, Jennings and Kuratko (1999) have pointed out that eighty-five percent of SMEs studies focus on manufacturing companies. Service companies, especially media firms, have received modest attention.

Following these rationales, I proposed three sub-research questions in chapter one:

1. How have small and medium Taiwanese enterprises managed to compete in China where policies favour the growth of domestic enterprises?

2. What strategies have Taiwanese digital content firms adopted to compete in the Chinese market?

3. How significant is the role of business practices such as guanxi to Taiwanese business success in Mainland China?

195 Through this multiple case study approach five Taiwan-based digital content companies that have operations in China were selected: Wang Film, Artkey, CnYES, Somode and iPartment. I conducted a field trip from November 2006 to March 2007 in Shanghai and Taiwan, which comprised interviews, documentation and archival reports. I interviewed six top managers and nine experts in order to acquire insight into strategies. I analysed the data according to the Miller’s firm-level entrepreneurship theory, foreign direct investment theory, Schuler and Jackson’s classification of business strategies, The Life Cycle Model, and guanxi philosophy.

In the following section, I summarize significant findings.

In chapter four, I discussed the Taiwanese DC companies’ entrepreneurial environment in China through the frameworks of societal environment, task environment and internal environment. I identified that government policy, capital, and the size of the domestic market are the main difficulties for Taiwanese digital content companies in the societal environment in China. I also found out Taiwanese DC firms have a short-term competitive advantage in China, including language, racial ties, an understanding of Chinese society, management, creativity, and good maintenance of Chinese traditional culture. However, in relation to the task environment Japanese and Korean digital content products are superior to Taiwanese ones at present. Finally, I observed that Taiwanese DC firms’ enterprise culture has fewer administrative levels, regular meetings, proper award systems and partnerships. However, Taiwanese DC companies’ strategy still emanates from senior management, especially the CEOs (internal environment).

I discussed the features of entrepreneurship in Taiwan: the ability to endure hardships, diligence, entrepreneurial spirit, conservatism, and creativity. Edwin W.K. Lo, the chairman of Department of Advertising, Chinese Culture University pointed out that because of the strong influence of Confucianism, few enterprises in Taiwan struggle alone. Most involve couples, friends, and partners. From this perspective, entrepreneurship in Taiwan is conservative and less adventurous. People want to share risk.

196 I discussed the three sub-research questions in chapter seven. My first sub-research question is How have small and medium Taiwanese enterprises managed to compete in China where policies favour the growth of domestic enterprises? The development of entrepreneurship in China has undergone several important stages. More particular to entrepreneurship in China is the link between entrepreneurship and its institutional environment. I also discussed the entrepreneurship in Taiwan by employing the ‘strategizing in disequilibrium framework’ (Mathews 2006). Although they have specific business patterns entrepreneurship in Taiwan, as illustrated in the fives case studies, follows the RARE framework. I explored how entrepreneurship management complements strategic management in DCIs in the Chinese market and how Taiwanese entrepreneurs have utilized the characteristics of digital content industries.

To respond to my second question, What strategies have Taiwanese digital content firms adopted to compete in the Chinese market? I emphasized how Taiwanese DC firms’ strategies apply in the Chinese market. In chapter five, I showed how different approaches apply to companies that conduct off-line activities—in the sense that their products are produced in more traditional formats. In the case of Wang Film, it gradually developed from fee-for-service work (fabrication) towards original content and finally outsourcing to Mainland China. In the case of Artkey it adopted different kinds of art licensing methods as its business model. It also employed IP application as a bridge between artists and industries, and between Asia and international markets. I examined the strategies among three web-based Taiwanese digital firms in China: CnYES, Somode and iPartment in chapter six. Finally, I noted three main kinds of Taiwanese digital content firms’ business strategies, namely cost-reduction, innovation, and quality-enhancement strategies, and four categories of functional strategies: product, marketing, resource acquisition, and organization restructure strategies.

Wang Film Artkey CnYES Somode iPartment Product - ‧ Art licensing ‧ E-Commerce ‧New Format ‧ White-collar and itself ‧ Tai-son.Com E-magazines girl strategies ‧ Web 2.0 Marketing ‧ Partner with ‧ Beijing Olympic ‧ E-Commerce ‧New Format ‧ Web 2.0 CCTV Games ‧ Tai-son.Com Advertisements ‧ Customized ‧ Self-production ‧ Participate in Art ‧ Synergy advertisements Film ‘Fire Ball’ exhibition

197 ‧ Combination with Internet Resource ‧ Partner with ‧ Acquire licenses - - - Acquisition Huqiu in China ‧ Animation ‧ Beijing Olympic Satellite Games Factories Organization - - - ‧Management buyout ‧Venture capital (VC) Restructure and VC Table 8.1: Five Cases’ Functional Strategies Source: Compiled by Researcher for this Study

Following this, I re-examined digital content products by adopting the ‘three level digital content products model’ discussed in chapter two. The ‘core ’ digital content products and services are computer animation (Wang Film), network service (CnYES, iPartment), E-publishing and digital archiving (Artkey, Somode). Most digital content companies produce ‘non-core ancillary ’ products and services. In the cases investigated here they include publications and literature (Wang Film, Artkey, Somode, and iPartment), motion picture and video (Wang Film, Somode), radio and television (Wang Film), software and databases (Wang Film, CnYES), visual and graphic arts (Artkey), advertising services (Somode), and copyright collective management societies (Artkey). ‘Related ’ products and services expand the range from media-based into pan-art and cultural goods, for instance various ‘related’ goods, topic tours, and branded services. The five digital content firms also produce ‘sub-associated’ digital content products, including new online products (CnYES, Somode, iPartment), new embodied products (Wang Film, Artkey, CnYES), traditional products (Wang Film, Artkey, Somode, iPartment), and support products and services (Artkey, Somode). This model not only divides digital content products into core, non-core ancillary, and sub-related, but also describes the relationships and synergies between digital content industries, content industries, and creative industries. In addition, it is also a good model to examine the future possibilities of digital content industries. While digital content industries seem to be ICT-based, they exploit creativity from traditional industries. Digital technology is the best medium between old and new media, and between old and new industrial dynamics.

In this thesis, I integrated the ‘life cycle model’ with the dynamic concept of strategy. I found that there are significant differences in the evolution of strategy between two types of

198 digital content firms: off-line (Wang Film and Artkey) and web-based firms (CnYES, Somode and iPartment). Off-line digital content firms usually adopted the ‘resource acquisition strategies’ in the first stages and ‘marketing strategies’ in the second stages. By way of comparison, off-line digital content firms, web-based digital content companies mainly adopted both product and marketing strategies in the beginning, and innovation of product and marketing in next stages. Two of the case studies adopted organizational restructuring strategies in the final stage.

Finally, I proposed the ‘Taxonomy Matrix of Entrepreneurial Strategies’ to emphasise the two dimensions: innovation and the firm’s resources. This matrix is divided into four cells called Effective, Bounded, Conservative, and Impoverished.

The Level of Innovation High Firms’of Level The Resources Type 3 Conservative Type 1 Effective

Animation Satellite Factories, Partner with Art License (Artkey) Huqiu, CCTV (Wang Film) Taison.Com (CnYES) Beijing Olympic Games, Art Exhibition, Flash Format (Somode) Combination with Internet (Artkey) Girl Strategies, Web 2.0 (iPartment) Customized Advertisement (Somode, Capital Venture (Somode, iPartment) iPartment) Type 4 Impoverished Type 2 Bounded

OBM Animation Films (Wang Film) - Financial E-Commerce (CnYES)

Low High

Figure 8.1: The Application of ‘Taxonomy of Entrepreneurial Strategies’ Source: Compiled by Researcher for this Study

The third research question was How significant is the role of business practices such as guanxi to Taiwanese business success in Mainland China? I paid particular attention to the questions of cultural proximity and discussed the concept of ‘entrepreneurial guanxi ’ in pan-Chinese society, referring to special relationships and mutual obligations and how the exchange of favours among entrepreneurial activities leads to opportunities and sharing of resources.

199 Following this, I drew up the ‘Entrepreneurial Guanxi Taxonomy Matrix’ with two dimensions: ‘Association, Benefit’ (structure) and ‘Trust, Reciprocity’ (qualities) to divided four different types of entrepreneurial guanxi : Strong (Quadrant 1), Unfulfilled (Quadrant 2), Aspiring (Quadrant 3) and Weak (Quadrant 4). Entrepreneurs’ guanxi types were defined using this matrix and this allowed me to estimate entrepreneurial success factors (see Figure 8.2).

I examined the dynamic processes pertaining between entrepreneurship, entrepreneurial strategies and entrepreneurial guanxi , and introduced two dynamic models: Entrepreneurial Guanxi Pursuit Model and Entrepreneurial Guanxi Decision Model.

Association, Benefit between Individuals High

between between Trust, Reciprocity Quadrant 3 Quadrant 1

Aspiring Entrepreneurial Guanxi Strong Entrepreneurial Guanxi

Individuals

Quadrant 4 Quadrant 2

Weak Entrepreneurial Guanxi Unfulfilled Entrepreneurial Guanxi

Low High

Figure 8.2: Entrepreneurial Guanxi Taxonomy Matrix Source: Compiled by Researcher for this Study

8.2 Limitations and Recommendations

In this section, I would like to discuss the limitations in this thesis. Then, based on the research results of this study, I propose recommendations for further research.

Limitations

The survey of international entry strategies in this thesis is limited to Taiwanese digital content firms. While it presents strong empirical evidence of Taiwan’s cultural proximity and advantages in the Chinese market, it doesn’t show how this can be measured, such as

200 through comparisons with other countries entering the Chinese market .

Further research

I believe this thesis provides a way forward for other scholars interested in investigating the phenomenon of international entry strategies and entrepreneurship in digital content industries in China. Finally I would like to highlight some topics that I believe require more investigation and discussion.

First, I belive there needs to be more deductive theory building togerher with empirical study, which might induce and test more finely-grained propositions and hypotheses. Further research might require changes to be made to my research methodologies. For example, researchers could develop hypotheses and test explanations rather than assemble facts. This can potentially yield useful and testable theories in the field of entrepreneurship. In addition, such studies will also require interdisciplinary investigation in the future.

Second, the field of entrepreneurial guanxi needs much more attention. I call for more studies to find out the necessary conditions for entrepreneurial guanxi , the related elements of entrepreneurial guanxi capital and the factors impacting on entrepreneurial guanxi . Are there differences in building and maintaining entrepreneurial guanxi from the G.A.I.O. framework 57 or FBT Relationship ( guanxi ) Perceptual Map 58 ?

Third, although most interviewees and scholars agree there is more guanxi in Pan-Chinese society than elsewhere, the boundaries of guanxi are contentious. As discussed in the thesis ‘Confucian nations’, such as China, Korea, Vietnam, Thailand and even Singapore and Malaysia, which have a sizeable number of citizens of Chinese-descent have applied a new concept of guanxi in business and politics. Guanxi affects firm performance in other countries, such as the so-called Chinese commonwealths (Hong Kong, Taiwan, Macau, and

57 Leung, Wong, and Tam (1995) proposed, describes the A1-A8 stages of guanxi building process from availability, association, acceptance, affective, affordable, affirmative, assurance to adaptation. 58 FBT Relationship (guanxi) Perceptual Map (Wong and Chan 1999, 117) divided map into four cells, namely Fencer, Fiancé, Favourable Partner and Friend (Old).

201 Singapore). Therefore guanxi is not unique to China: similar thinking also impacts on business in Japan, Korea and India. Guanxi also pervades the business cultures of Japan, Korea, India, Russia and other economies in which there are highly authoritarian political systems. I suggest that researchers might develop some comparative studies via an understanding of social, culture, and legal system in different countries.

In conclusion, we need more interdisciplinary, multi-method and comparative studies associated this topic in the future.

Recommendations for Practice

From the experiences of Taiwanese digital content firms, I note six critical success factors relating to how Taiwanese entrepreneurs conduct their business in China as recommendations for practice.

First, cultural adaptation is an important factor, including language, local product modification and customer familiarity. Second, it is important to establish as much official guanxi as possible. Third, Taiwanese firms seek to use the wholly owned entry mode together with strong partnerships. Wholly owned or high control investment is a better entry mode in China because it allows strategies and policies to be more consistent with goals or visions. However, if digital content firms have noticeable cultural differences, it may be better to cooperate with strong Chinese-based partners or employ trusted local people as managers. Fourth, Chinese customers generally appreciate cultural products with local flavours. Alternatively, innovative digital content products of Western digital content firms sometimes have the advantage of appearing ‘cool’, which adds to their popularity. Fifth, Taiwanese DC firms utilise local advantages, such as labour, distribution systems, media and other resources. Some Taiwanese exploit the idea of ‘brotherhood’ as a good tool to obtain favourable conditions. Sixth, in negotiations, Taiwanese tend to be patient and persistent. China is also a tough market even for Taiwanese digital content firms. Most things can be flexible in China if you find the right way. In negotiations with Chinese suppliers and partners, it is possible to obtain a better offer.

202 Appendixes

Appendix 1. Detail of Law Regarding Foreign Investment in China

Chang (1998) presented the three major laws concerning foreign capital investment in China: The Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures was adopted on 1 July, 1979 at the Second session of the Fifth National People’s Congress. The Fourth Session of the Sixth National People’s Congress adopted the Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises on 12 April, 1986. The Law of the People’s Republic of China on Chinese-Foreign Cooperative Joint Ventures was adopted at the First Session of the Seventh National People’s Congress on 13 April, 1988. The Detailed Implementing Rules for the Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures was issued on 20 September, 1983 and revised in 1986, 1987. The “Detailed Implementing Rules for the Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises was issued on 12 December, 1990. The Detailed Implementing Rules for the Law of the People’s Republic of China on Chinese-Foreign Cooperative Joint Ventures was approved on 7 August, 1995.

The People’s Republic of China (PRC) and the Republic of China (ROC) share similar cultures, language, and history. Since separation, economic and political systems have evolved differently. However, because of the PRC argument that Taiwan is part of China, it is granted special status and Taiwan enterprises do not enter the Chinese market as foreign firms. This review of the legal structure attempts to clarify the issue. The PRC government encourages Taiwanese investment through favoured treatment such as tax benefits. Most governments have regulations regarding foreign capital investment. The following section identifies comparisons between Taiwanese and foreign firms from a review of existing laws.

Since 1978, the PRC government has issued regulations and laws such as Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures, Law of the People’s Republic of China on Wholly foreign-owned Enterprises and so on regarding foreign capital investment. A cooperative joint venture means the rights and obligations between parties are

203 defined by contracts; an equity joint venture means partners share profits and risks via proportion to their respective contributions to the registered capital. In order to encourage foreign investment, these laws specify preferential treatment and play an important role to attract foreign capital. On the other hand, the laws impose specific restrictions to foreign capital in order to maintain China’s economic sovereignty.

Investment from Taiwan is treated differently for historical and political reasons. China has separated Taiwanese investment from foreign investment since 1988. In order to exchange economic and technological benefits between Taiwan and China, the Chinese government has legislated favourable treatment in laws and regulations to encourage Taiwanese investment.

The laws or regulations regarding Taiwanese Investment in China are the Specification on Encouraging Investment from Taiwan Compatriots (State Council 1988), P. R. China’s Law to Protect Investment from Taiwan Compatriots” (People’s Congress 1994), and Execution Details for P.R. China’s Law to Protect Investment from Taiwan Compatriots (State Council 1999).

Article 8 of Specification on Encouraging Investment from Taiwan Compatriots (1988) states the nationalization will not be enforced for Taiwanese investment; furthermore, Article 9 states if there is a need for nationalization, proper compensation will be paid (Specification on Encouraging Investment from Taiwan Compatriots 1988). Article 10 proposes that profits from Taiwan investment can be sent to Taiwan (Specification on Encouraging Investment from Taiwan Compatriots 1988). Furthermore, Article 5 states Taiwan investment should also comply with relevant laws regarding foreign investment and receive favoured treatment that is specified in laws regarding foreign investment (Specification on Encouraging Investment from Taiwan Compatriots 1988). According to Article 5, China’s government treats Taiwan investment as a special foreign investment. Besides this, the Specification on Encouraging Investment from Taiwan Compatriots (1988) is just an administrative decree, thus the protection for Taiwanese firms is a little unstable.

204 After the Specification on Encouraging Investment from Taiwan Compatriots was revised in 1988, the P.R. China’s Law to Protect Investment from Taiwan Compatriots was adopted in 1994. Hence, most of the Articles in P.R. China’s Law to Protect Investment from Taiwan Compatriots (1994) are the same as the Articles in the Specification on Encouraging Investment from Taiwan Compatriots (1988). P.R. China’s Law to Protect Investment from Taiwan Compatriots (1994) is a formal law and therefore can provide better protection than an administrative decree. The P.R. China’s Law to Protect Investment from Taiwan Compatriots (1994) is treated as the only principle when Chinese deal with Taiwanese investment. Bilateral agreements or documents between Taiwan and China are not permitted to break the P.R. China’s Law to Protect Investment from Taiwan Compatriots (1994) (Chuang 1994). Article 2 states that Taiwan investment shall comply with the law (P.R. China’s Law to Protect Investment from Taiwan Compatriots 1994), decrees, relevant rules, and regulations of the China if not been specified. According to Articles 2, China identifies Taiwan investments as a special domestic investment. Article 13 of P. R. China’s Law to Protect Investment from Taiwan Compatriots further states that Taiwanese investment can continue enjoying preferential treatment in accordance with regulations in the Specification on Encouraging Investment from Taiwan Compatriots (1988), i.e., receive favoured treatment that is specified in laws regarding foreign investment.

The Execution Details for P.R. China’s Law to Protect Investment from Taiwan Compatriots (1999) specifies the P. R. China’s Law to Protect Investment from Taiwan Compatriots (1994). Overall, no great modification was made compared with the previous Specification on Encouraging Investment from Taiwan Compatriots (1988) and P. R. China’s Law to Protect Investment from Taiwan Compatriots (1994). According to Article 4 of Execution Details for P.R. China’s Law to Protect Investment from Taiwan Compatriots (1999), China identifies Taiwanese investments as a special domestic investment. And Article 5 states if in P.R. China’s Law to Protect Investment from Taiwan Compatriots (1994) and Execution Details for P.R. China’s Law to Protect Investment from Taiwan Compatriots (1999) had not been specified, Taiwanese investment would comply with foreign investment laws. Articles 10, 11, 12, 23 and 27 of the Execution Details for P.R. China’s Law to Protect Investment from Taiwan Compatriots (1999) reveal that China’s government keeps improving the

205 services to Taiwanese investment. Taiwanese favoured treatment is similar to that of foreign investment (Chou 2000). Table A1.1 provides the major investment laws of China by time. Year Investment from Taiwan Foreign Investment 1979 Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures 1986 Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises 1988 Specification on Encouraging Investment from Law of the People’s Republic of China on Taiwan Compatriots Chinese-Foreign Cooperative Joint Ventures 1994 P.R. China’s Law to Protect Investment from Taiwan Compatriots 1999 Execution Details for P.R. China’s Law to Protect Investment from Taiwan Compatriots Table A1.1: Major investment laws of China Source: Compiled by the Researcher for this Study

For the Execution Details for P.R. China’s Law to Protect Investment from Taiwan Compatriots (1999), it adds Articles regarding the personal safety and education of Taiwanese investors’ children. This shows that the Chinese government keeps improving the service to the Taiwan investment. In order to follow the non-discrimination policy of the WTO, however the Chinese government insists Taiwanese firms group into the same preferential treatment as foreign companies. According to Article 4, China treats Taiwanese investments as a special domestic investment. Therefore Article 29 states that the choice of arbitrating institutions for Taiwan firms is limited to Chinese institutions. Hence, dispute settlements for Taiwanese firms are worse than for foreign investors.

From the comparison above, we can find that there are no major different treatment between foreign investment and Taiwan investment, except the unlimited the scope of business activities in the Specification on Encouraging Investment from Taiwan Compatriots (1988). While there is a lack of agreement on investment protection or bilateral agreement between Taiwan and PRC government, the arbitrating institutions’ choice of dispute settlement makes Taiwanese firms face more adverse circumstances than foreign investors. Therefore, we can conclude that foreigners and Taiwanese investors enjoy very similar preferential treatment.

I compare the differences between the Law of Foreign Investment and Execution Details for P.R. China’s Law to Protect Investment from Taiwan Compatriots (1999). Most treatments between them are the same, including preferential treatment, entry mode choice, foreign

206 exchange, conditions of nationalization or expropriation, days for examination and approval, restriction in scope of business activities, profit or salary remitted abroad, and management decision-making.

As I mentioned above, the Chinese government seeks to protect the national cultural sovereignty. There is a very strong component to the production of media, and many restrictions are placed on media industries’ investments in China. The Chinese government takes into account the political background of overseas partners and prevents joint ventures or co-operations from bringing ‘harmful foreign thinking’ into the production sector (BBC 2005).

The Detailed Implementing Rules for the Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises were promulgated in 1990, and announced that newspapers, publishing, radio, TV, and movies industries cannot accept foreign capital, thus foreign investors have proceeded with partnerships through co-cooperation exchanges. In this model, called the Zhong-Zhong-Wai Model the foreign venture (wai) forms a relationship with a Chinese partner who then provides an opening into the market (Keller 2000).

With China’s entry into the WTO in 11 Oct. 2001, there were a number of market liberalizations under the GATS. The Catalogue of Foreign-Owned Enterprises Invest Guide (Ministry of Commerce of the People’s Republic of China 2004) announced seven investments related to digital content industries could be allowed, including mobile information services, E-commerce, direct sales business, software products’ production and development, distribution and retail of books, newspapers, periodicals, cinema management (limited to Chinese holding companies), production of TV and radio programs, and production of movies (limited to Chinese holding companies). This guide also allows the distribution and retail sales of video/audio products (except movies), and allows the building of joint ventures with foreign firms (foreign shares limited less than 49 percent).

Seven investments related to digital content industries are still banned in China: news institutions, video showing firms, movie publishing firms, publishing and broadcasting firms of radio and TV programs, publishing, chief distribution and import of books, newspapers,

207 periodicals, publishing, chief distribution and import of video/ audio products and electronic publishing products, and radio, TV stations and radio and TV transmission net (transmitters, relay stations, satellites, satellite uplink stations, satellite relay stations, microwave telecommunication networks, monitor stations, cable networks).

Foreign investors run several digital content industry businesses in China. They are expected to observe the laws or regulations of foreign investment mentioned above, and relevant laws and regulations, judicial explanations and regulatory files. Those regulations have been divided into the following two parts: Regulations of Internet/Telecommunication Management (The Regulation of Entertainment Places Management in State Council Document 2611999 59 ; The Regulation of Internet Service Places Management 2000 60 ; Regulation of Internet Information Service Management in State Council Document 292 2000 61 ; The Management Regulation of Internet and Other Information Network Broadcast Video/Audio Programs 2004 62 ; Regulation of Foreign Investment of Telecommunication Industries 2002 63 ), and Regulations of Video/Audio Programs and Products Management

59 According to The Regulation of Entertainment Places Management in State Council Document 261 (State Council 1999), theChinese government banned wholly foreign investment in entertainment venues. Those places are banned from setting up arcade games with gambling functions like returning coins, steel balls or tickets; arcade games also are banned from providing for minors, except on national holidays. Further more, if there are any changes in the number of games, manager should inform original culture department to examine. 60 The management of Internet services have similar regulations about content management with entertainment places, for example, they are all baned from showing pornography, violence, and the destruction of national safety and unity. However, there are stricter regulations on Internet service places’ management, such as limits to the location and operting times of the business, According to The Regulation of Internet Service Places Management (Ministry of Culture 2002) .The regulation bans gambling, availability to minors, providing non-online games, setting up Internet service places within 200 meters around primary and junior high schools and limits business from 8a.m. to midnight. This regulation orders managers examine, register user ID and record related online information, limits the Internet connection access to Internet via LAN and also adopts a permission system with foreign investment. 61 According to Regulation of Internet Information Service Management in State Council Document 292(State Council 2000), Internet services industries adopt permission and register systems. Internet information providers should record users’ content, time and IP; Internet connecters should record users’ account, time, IP and telephone number over 60 days. 62 According to The Management Regulation of Internet and Other Information Network Broadcast Video/Audio Programs in The State Administration of Radio, Film and Television Document 39 (The State Administration of Radio, Film and Television 2004), the video/audio programs’ broadcasters (via Internet, mobile phone and so on) adopts a permission system, and bans wholly foreign investment, JV and cooperating Chinese-Foreign institutions. The broadcasters should acquire the License of Information Network Broadcast Video/Audio Programs; the valid period of the license is two years and they should reapply six months before expired date. The broadcasters can only broadcast domestic and approved programs, broadcast or links to foreign programs are banned; they also need to retain program names, content abstract, time and sources for at least 30 days. 63 Telecommunication management’s primary law, Regulation of Foreign Investment of Telecommunication

208 (The Regulation of Broadcast and TV Request Programs Management in The State Administration of Radio, Film and Television Document 35 2004 64 ; The Regulation of Broadcast and TV Management in State Council Document 228 1997; The Regulations of Foreign TV Programs Import and Release in The State Administration of Radio, Film and Television Document 42 2004; Energy Notice about Foreign Animated Cartoons 2005 65 ;The Regulation of Video/Audio products Management in State Council Document 165 1994 66 ; The Regulation of Chinese-Foreign Cooperate Video/Audio Products Distribution 2002 67 ;

Industries (State Council 2002), states foreign investment of Telecommunication adopts a permission system and regulates foreign invest telecommunication industries so that foreign shares are not permitted to exceed 49 percent of basic telecommunication Industries, and inventments must not exceed 50 percent of value-added industries. Telecommunication firms should auto-record the send-receive time, telephone numbers of SMS for at least five months. 64 Broadcast and TV Request Programs’ broadcasters also adopt a permission system, and are banned wholly on foreign investment, JV and Chinese-Foreign cooperate institutions, except three-stars and above hotels. The State Administration of Radio, Film and Television (SARFT) ensures the amount of firms, and manages national broadcast and TV request programs and market structure. According to The Regulation of Broadcast and TV Request Programs Management in The State Administration of Radio, Film and Television Document 35(The State Administration of Radio Film and Television 2004), the broadcasters should acquire the License of Broadcast and TV Request Programs. The valid period of license is three years and they should reapply six months before expired date. Broadcast and TV Request Programs Firms only can provide those programs that have been approved. 65 The Chinese government does not merely control the foreign investors of radio and TV stations, but also the domestic managers; Chinese radio and TV stations can only be set up by departments of broadcast and TV in the county or other higher-level governments, except education TV station which can be set up by departments of education. Regulations only allow one cable network per district to set up. The department of TV drama production should acquire ‘production permission’ from the broadcast and TV department of state council. If those radio or TV programs want to provide to foreign media, they should inform broadcast and TV departments of the county or other higher-level governments. Concerning the content management, every program should be examined before it is released, and re-examined before it is re-released. Foreign movies, TV dramas and other programs must be examined and approved by broadcast and TV departments of state council or other institutions. Broadcast and TV departments of state council also regulate the percentage of broadcast time between domestic, foreign programs and advertisements. The proportion of broadcast time of foreign TV dramas must be less than 20 percent of all TV dramas released everyday; the broadcast time other foreign programs must be less than 15 percent of all broadcast time everyday. Foreign TV dramas should acquire permission to broadcast during prime time (19:00-22:00), and domestic animations must make up at least 60 percent of all animations (The Regulation of Broadcast and TV Management in State Council Document 228, State Council 1997; The Regulations of Foreign TV Programs Import and Broadcasting in The State Administration of Radio, Film and Television Document 42, The State Administration of Radio, Film and Television 2004; Energy Notice about Foreign Animated Cartoons, The State Administration of Radio, Film and Television 2005) 66 Video/Audio producers must adopt a permission system, and are allowed cooperation with foreign firms. The publishing department of the state council ensures the amount of national video/audio publishing firms and the market structure. Video/Audio products should acquire permission to be released, copied, retailed and imported (The Regulation of Video/Audio products Management in State Council Document 165, State Council 1994). 67 The distributors of Video/Audio products must also a adopt permission system, and have conditions to cooperate with foreign firms (Chinese shares can’t below 51 percent and duration can’t over 15 years). The Chinese co-operator should get a License of Video/Audio products Management, Permission of Foreign Investment Industries and License of Enterprise Management, and Ministry of Culture examines License of

209 The Regulation of Movies Management in State Council Document 342 2001 and The Regulation of Chinese-Foreign Cooperate Movie Production in The State Administration of Radio Film and Television Document 31 2004 68 )

As in the section on media structure I mentioned above, the Chinese government adopts stricter regulations in media industries. However, we would conclude that new media such as the Internet and Telecommunications are value-added industries and although are difficult to control by geographic area, they still have looser regulations than news institutions, and even traditional media investment. According to those regulations, most of DCI’s investors would not employ the wholly-owned entry modes, which shows the importance of Chinese partners. The permission system, which a number of regulations include, is a trick the Chinese government plays. Sometimes foreign investors have sufficient conditions of application, but it is still difficult to get the operation permission in China. For instance, it is easier for a DCI to get permission related to in business practices than in entertainment content. Guanxi has played a critical role in many business applications in China. However, because of the Chinese government’s stricter rules for DCI and the complex censorship rules, Guanxi seems more important for DCI.

According to The Regulation of Entertainment Venues Management in State Council Document 261(State Council 1999), entertainment venues are allowed to be majority-owned

Video/Audio products Management every two years. These cooperating Chinese-foreign distributors are not permitted to manage imports of video/audio products. Imported Video/Audio products still should get the permission from Ministry of Culture (The Regulation of Chinese-Foreign Cooperate Video/Audio Products Distribution in Ministry of Culture, Ministry of Foreign Trade and Economy Document 20, Ministry of Foreign Trade and Economy 2002). 68 According to The Regulation of Movies Management in State Council Document 342 (State Council 2001) and The Regulation of Chinese-Foreign Cooperate Movie Production in The State Administration of Radio Film and Television Document 31(The State Administration of Radio Film and Television 2004), movie producers are not permitted to cooperate with foreign producers, except when they have acquired the permission from broadcast and TV department of state council. The Chinese government allows foreign cooperation or JV to manage cinemas. The conditions are: Chinese shares must exceed 51 percent, except in experimental cities such as Beijing and Shanghai where this can be loosened to 25 percent of shares, and the duration of the arrangement must not exceed 30 years. Cinemas also have the regulation to release 2/3 or higher percentage domestic movies per year. Movie producers should acquire the permission from the broadcast and TV department of state council to shoot a film aboard; the Chinese government also bans foreign institutes and individuals from shooting film in China independently. In the case of a Chinese-foreign movie co-production, the foreign main creators (director, screenwriters and main actors) must not exceed 66% of the staff involved, and movies must be examined and approved before publishing, release, import and export.

210 by foreign firms (equity share ranges between 51 and 90 percent). Four industries are allowed equal foreign investment (equity share is split 50-50): (1) telecommunications value-added industries (Regulation of Foreign Investment of Telecommunication Industries in State Council Document 333 State Council 2002), (2) distributors of video/audio products (The Regulation of Video/Audio products Management in State Council Document 165 State Council 1994), (3) the production of TV and radio programs and the production of movies (The Catalogue of Foreign-Owned Enterprises Invest Guide Ministry of Commerce of the people’s republic of China 2004; The Regulation of Video/Audio products Management in State Council Document 165 State Council1994; The Regulation of Movies Management in State Council Document 342 State Council 2001; The Regulation of Chinese-Foreign Cooperate Movie Production in The State Administration of Radio Film and Television Document 31 The State Administration of Radio Film and Television 2004) , and (4) cinema managemen t69 . (The Catalogue of Foreign-Owned Enterprises Invest Guide Ministry of Commerce of the people’s republic of China 2004; The Regulation of Movies Management in State Council Document 342 State Council 2001).

Basic telecommunication and movie production industries are allowed to be minority-owned by foreign investors (Regulation of Foreign Investment of Telecommunication Industries in State Council Document 333 State Council 2002; The Regulation of Movie Industries Management in The State Administration of Radio, Film and Television Document 43, The State Administration of Radio, Film and Television 2004). Two industries are allowed to adopt contractual and export entry modes, including video/audio program broadcasters on the Internet and other information networks 70 (The Management Regulation of Internet and Other Information Network Broadcast Video/Audio Programs in The State Administration of Radio, Film and Television Document 39 The State Administration of Radio, Film and Television 2004) and broadcast and TV request programme broadcasters 71 (The Regulation of Broadcast and TV Request Programmes Management in The State Administration of

69 Except in experimental cities such as Beijing or Shanghai where foreign ownership can be loosened to 74 percent, but the duration of the investment must not exceed 30 years. 70 This regulation bans wholly foreign investment, JV and Chinese-Foreign cooperate institutions 71 This regulation bans wholly foreign investment, JV and Chinese-Foreign cooperate institutions, except in three-stars and above hotels.

211 Radio, Film and Television Document 35 The State Administration of Radio Film and Television, 2004).

The Chinese government allows Internet service places and Internet information service management 72 to adopt a permission system (The Regulation of Internet Service Places Management in State Council Document 363 State Council 2002; Regulation of Internet Information Service Management in State Council Document 292 State Council 2000).

72 Applicants must be Chinese. If applicants want to cooperate on joint ventures with foreign firms, they should get permission from the State Council.

212 Appendix 2. Questionnaire

Part 1: Firm-level Entrepreneurship Scale

˙˙˙ Please fill out the following questionnaire according to the real situation in your company

In general, the top managers of my firm favour…. A strong emphasis on the marketing of A strong emphasis on R&D, tried and true products or services 1 to 7 technological leadership, and innovations Answer: How many new lines of products or services has your firm marketed in the past 5 years? No new lines of products or services 1 to 7 Changes in product or service lines have usually been quite dramatic Answer: Changes in product or service lines have 1 to 7 Changes in product or service lines have been mostly of a minor nature usually been quite dramatic Answer: In dealing with its competitors, my firm…. Typically responds to actions which 1 to 7 Typically initiates actions which competitors initiate competitors then respond to Answer: Is very seldom the first business to 1 to 7 Is very often the first business to introduce new products/services, introduce new products/services, administrative techniques, operating administrative techniques, operating technologies, etc. technologies, etc. Answer: Typically seeks to avoid competitive 1 to 7 Typically adopts a very competitive, clashes, preferring a “live-and-let-live” “undo-the-competitors” posture posture Answer: In general, the top managers of my firm have. … A strong proclivity for low-risk projects 1 to 7 A strong proclivity for high-risk projects (with normal and certain rates of return) (with chances of very high returns) Answer: In general, the top managers of my firm believe that. … Owing to the nature of the environment, it 1 to 7 Owing to the nature of the environment, is best to explore it gradually via timid, bold, wide-ranging acts are necessary to incremental behaviour achieve the firm’s objectives Answer: When confronted with decision-making situations involving uncertainly, my firm… Typically adopts a cautious, 1 to 7 Typically adopts a bold, aggressive “wait-and-see” posture in order to posture in order to maximize the minimize the probability of making costly probability of exploiting potential decisions opportunities Answer:

213 Part 2: Strategic Planning Levels

˙˙˙ Please tick one blank that you regard the description on its right side is most suitable to real situation of strategic plans in your company

Tick Area Explanations Formalized, written long-range covering the process of determining the major outside Internet focused on the organization; expectations of dominant inside interests; information about past, current, and future performance; environmental analysis; and determination of strengths and weakness of the firm and feedback. Typically 3-15 years in nature. Written short-range operational budgets and plans of action for current fiscal period. The typical plan of action would include basic output controls, such as production quotas, cost constraints, and personnel requirements. These formal plans are developed and implemented based on the intuition and experience of the firm’s owner. They depend on objectives of the owner and the firm’s present environment. No measurable structured planning in the firm

Part 3: Organizational Performance Scale

˙˙˙ Please fill out the following questionnaire according to the real situation in your company

Compare with other DCI competitors in past 2 years, my firm…. Has lower sales growth rate 1 to 7 Has higher sales growth rate Answer: Has lower market share 1 to 7 Has higher market share Answer: Has smaller amount of products/ 1 to 7 Has larger amount of products/ service service Answer: Has lower net profit 1 to 7 Has better net profit Answer: Has lower ROI 1 to 7 Has better ROI Answer: Has lower customers loyalty 1 to 7 Has better customers loyalty Answer: Has lower reputation from customers 1 to 7 Has higher reputation from customers Answer: Has lower process/quality 1 to 7 Has better process/quality improvement improvement Answer: Has lower R&D ability 1 to 7 Has higher R&D ability Answer: Has lower % profits from new 1 to 7 Has higher % profits from new products / services products / services Answer:

214 Part 4: Background

Company Background Numbers of Total Employees: Number of Employees in China: Numbers of Employees in Taiwan: Year of Entry into the Chinese Market: Net Profit (China/Whole company %):

Personal Background Name: Department: Title:

215 Appendix 3. Global Development in Digital Content Industries

Before focusing on Taiwan’s DC industries, it is necessary to provide an overview of global developments and national approaches to industry assistance. Because these are new industries, they do not follow a common market logic. The following section looks at the U.S., Canada, the UK, Japan, Korea, Singapore, Australia, New Zealand and Ireland.

The United States

The main institutions in digital content industries in the U.S. are EIC (Entertainment Industry Coalition for free trade), Federal Communication Commission (FCC), and Motion Picture Association of America (MPAA). The international promotion tools in American digital content industries are Especial 301 article and the WTO. The domestic cultural protection in the U.S. is exemplifies in the 1998 copyright law extension, to protect IP, and prime time access rules to ensure the variety of programs. In addition, American film industries are separated into production and publishing, and have preferential tax treatment. Hundreds of movie schools are the human resource base of American digital content industries (Ministry of Economic Affairs Digital Content Industry Office 2004, 1-29).

The National Research Council (2001) reported that the United States has important, major creative industries clusters, including Los Angeles with a particular emphasis on film, television, and music; New York with a particular emphasis on publishing and the visual arts; San Francisco with a particular recent emphasis on digital multimedia; and some smaller, more specialized clusters in Boston, Austin, and Nashville. Although there is a lack of specific detailed data about ITCP (Information Technology and Creative Practices), the potential fund for ITCP can be evaluated by examining the historic bases of funding for work in the arts, computer science, and other elements of IT R&D. The amount of indirect public funding for the arts through tax incentives is generally not included in the statistics data of government funding for the arts. Funding for artistic work is available from individuals, large and small foundations, and corporations in that order, and is shaped by tax policy.

216 Canada

Digital learning and digital visual/audio application industries have achieved positive performance results in Canada in recent years. Canada’s policies focus on developing post-production abilities and the government provides training and technical assistance to assist co-production ventures with Hollywood. Government departments such as the National Film Board (NFB) are responsible for formulating assistance policies, providing funds, awarding content creativity and building co-production models. The main policy is Canada’s Multimedia Guide. Canada has many co-productions with Hollywood, including games, tool software and digital learning industries. The Canadian government built a digital collections fund and a multimedia fund worth US$31.7 million dollars from 1998 to 2003 (Ministry of Economic Affairs Digital Content Industry Office 2004, 1-29 ; CIRAC 2003, 55). Clusters oriented software tools and productions have developed in Canada, especially in Toronto and Montreal (National Research Council 2001).

The United Kingdom

The British government’s Creative Industries Task Force addressed the development of British digital content industries in 1997. The main policies of British digital content industries are: (Ministry of Economic Affairs Digital Content Industry Office 2004, 1-30 – 1-31) The main policies and institutions in U.K. are Brand-New Britain (1997), Creative Industries Task Force, Arts and Humanities Research Board, Department of Trade and Industry, Digital Content Forum (DCF), Digital Content Sector Action Plan for Growth (2000) Supporting movies industries.

There are four task forces to promote creative exports, namely creative exports task force, performing arts international development task force, design partner plan, and culture heritage and tourism task force. In the next stage, the UK tried to establish a foothold in Hollywood. Department for Culture, Media, Sport (DCMS) and several British universities have collaborated in the Creative Higher Education Forum to develop creative industries education, research, and propose policies relating to creative industries for government. In

217 addition, the British government established the National Endowment for Science, technology and the Arts in 1998, and national films and TV schools to support education and training.

The UK Government provides an outstanding creative products fund, small firms funding project, regional pioneering fund, and regional finance forums to assist in venture expansion. It also invests in Channel 4. Department for Culture, Media, Sport (DCMS), bureau of customs and excise co-supervise creative industries taxes and regulations. The Creative Industries Task Force established a copyright website to provide useful information relating to copyright, trademarks, patents and design in June 2000. Local government are able to share decision-making powers with the cultural promotion section (CIRAC 2003, 56; Ministry of Economic Affairs Digital Content Industry Office 2004,1-30). The British government also set up two funds, the European Union Sixth Framework Research Programme and Broadband Content Pilots with public funds, aimed at SMEs. The government regulates the percentage of EU productions, and TV stations can only broadcast films over two years after they are released.

Japan

The key policies relating to digital content industries in Japan are the E-Japan Priority Plan and the Promoting Intellectual Property Rights Plan (Ministry of Economic Affairs Digital Content Industry Office 2003, 2-6 – 2-10; 2004, 1-31 – 1-32). The E-Japan Priority Plan includes building a high-level global Internet network, enhancing education and training, developing E-Commerce, digitizing the administration and public sectors, and ensuring Internet security and trust. The Promoting Intellectual Property Rights Plan is related to creating innovative content, protecting intellectual property rights, and promoting distribution. The Japanese government set up the movies and art industries fund and constructed a high-density Internet network. The government also set up producer training courses in universities, training institutions, and overseas.

218 Korea

According to Ministry of Economic Affairs Digital Content Industry Office (2004, 1-34), the main institutions in Korean digital content industries are Ministry of Information and Communication (MIC), Ministry of Culture and Tourism (MCT), KCIPC, KOCCA, KGDI, KIP and KDPC.

The critical digital content policies in Korea include Laws of Developing Online Digital Content Industries (2002), Content Korea Vision 21 (2001), and fundamental laws of reviving culture and so on. The Department of Korean Culture and Tourism established the Reviving Game Industries Mid-long Term Plan in 2003 and set out several objectives, including a plan to increase export value from $US 1.5 hundred million to US$10 hundred million; to increase game industries employee numbers from 34, 000 to 100,000 during this five years and to capture 5 percent of global market share in 2007(Ministry of Economic Affairs Digital Content Industry Office 2003, 2-1 – 2-6; 2004, 1-31-1-32). The Korean government provides many cartoons, animations and games industries funds, and supports movie production. In addition, it has also set up over 300 technique support centres for cartoons and formal Animation Academies. The government also regulates the percentage of broadcasting local cartoons, animations, TV programs, and even local movies. Games exports, international movies marketing, international co-cooperation and co-investment are the main promotion directions of Korean digital content products.

Singapore

The main Singaporean digital content industry policies are Creative Industries Development Strategy (2002) and Renaissance City (Creative Towns pilot). Its objective is to double its share of GDP by 2012. Its broad proposals about the arts are in education and Media Lab. CIRAC (2003, 56) proposed the three key prongs to strategy in Singapore: Renaissance City, Design Singapore, and Media 21. In the Renaissance City project, Singapore wants to become a global city for arts and culture and its main actions include the Creative Towns pilot, new cultural infrastructure and cultural entrepreneurship. The Design Singapore plan

219 focuses on integrated design between enterprises, new National Design Agency and Vibrant Design Community. Media 21 paid attention to Mediapolis, Singapore as a media exchange (copyright trades) and Export centre.

The government has set up Media Labs and Art Academies to train digital content industry staff. The Singaporean government has also established the New National Design Agency and Vibrant Design Community.

Australia

The main policies and institutions in Australia are Department of Communications, Information Technology and the Arts (DCITA), National Office for the Information Economy, The Australian Film Commission, The Learning Federation, Multimedia Victoria, Pacific Film and Television Commission, NOIE, and The Australia Council (CIRAC 2003, 27-33). CIRAC (2003) reported that the Australia’s digital content market focus varies by segment. Games is a young market and is ‘born global’, like many multimedia online services such as marketing, education, and advertising. Department of Communications, Information Technology and the Arts (2004) proposed the average gross value added multiplier in creative digital industry is higher than other sectors. An investment in creative digital industry by government will increase 23 percent more than domestic production of the overall economy than investment in other main industries (CIRAC 2003).

The same report notes that around 7,000 firms generate US$2,100 million and employ over 76,000 people per year in these industries. Most of these firms are small business, located in Australia’s major population centres. There is a definite tendency for these industries to group together in certain postcodes, but it is difficult to know how much of this is due to clustering dynamics. The Australian Interactive Media Industry Association and the Games Developers Association of Australia are two industry associations of note.

The Australian government has set up the Export Market Development Grants scheme, under the management of the Department of Foreign Affairs and Trade (DFAT), the Co-operative Multimedia Centres Programme (1996-2002), and the Sustainable Regions

220 Programme (2001) to promote digital content products.

New Zealand

Digital content industries, Biotechnology and ICT are three key national knowledge-based growth sectors in New Zealand (CIRAC 2003, 55). Numerous task forces were set up in 2002 which prepared papers and set objectives, but most of them did not yet fully form as strategies. New Zealand’s government has set up The Digital Future (2002) to focus on export, branding, and cluster development. It also set ambitious targets in Success by Design NZ project in 2003.

Ireland

According to Forf’as (2002), there are over 280 companies involved in the development of digital products and services, employing 4,000 and 4,500 people in the region. The industries have developed in clusters, namely publishing businesses (including web design), digital film and television and e-learning areas. The primary cluster, that has 87 percent of companies, is located in Dublin; other clusters exist in Limerick that just started in the e-learning area, and in Galway and Cork. In general, companies are fragmented and small size in Ireland, and limited export markets are just developing. Skills and competencies vary with sectors of the industry value chain, for example, e-learning needs high-level competency; whereas other areas, such as digital film and TV, are more focused on single aspects that transfer and manage content. The main institutions are Forf’as, Digital Hub, and Media Lab Europe. The chief policy is the Digital Content Strategy (2002).

Ireland’s government has set up Research, Technology & Innovation (RTI), Competitive Grants Initiative, R&D Capability Grants, a specialist venture capital fund, and public sector ‘digital library’ to support digital content industries (CIRAC 2003, 55; Forf’as 2002).

221 China

According to CNNIC (2005), 103 million households in China have access to the Internet. 53 million Internet household connections are on broadband; in addition 49.5 million use dial-up connections, 29.7 million by T1, and 5.5 million by ISDN. The percentage of Internet users reached 9.9 percent (120 million) by 2003. There were 256 million mobile phone owners in China by 2003 and in 2008 there are more than 350 million; and telecom equipment manufacturing is the number one industry field (Jin 2005).

The National Bureau of Statistics of China (Cited ICIC 2005) presented the classification of culture and related industries in 2004. News service industries, publication copyright industries, film, television, and broadcast industries, digital content service industries, performance, entertainment and art industries, travel, leisure relating industries, advertisement, trade fairs and other content industries were provided with new classifications. It reflects the future vision of content and creative industries.

Keen competition, new media (the focus on digital related media) and consumer demand for higher quality have led to a transformation of many cultural industries within the broader economy, as well as within the mass communication environment.

Three bottlenecks in Chinese creative industries are identified in ICIC (2005). First, different regulatory ministries and departments have fragmented the Chinese creative industries’ value chain. Second, ideological restrictions are still placed on production. Third, the human resources of cultural industries are insufficient in China, especially the professionals with experience in international markets.

According to the official statistics from National Bureau of Statistics of China (2005) at the end of 2004, there were 2,599 performing art groups, 2,858 culture centres, 2,710 public libraries and 1,509 museums in China. There were 282 radio broadcasting stations, 314 television stations and 60 educational television stations throughout China. Subscribers to cable television programs reached 114.7 million. Digital cable television services covered 30

222 cities in China with 1.22 million subscribers. The radio-broadcasting coverage rate was 94.1 percent and the television broadcasting coverage rate was 95.3 percent. China produced 212 feature movies, and 44 science, educational, documentary or cartoon movies in 2005. A total of 25.77 billion copies of national and provincial newspapers and 2.69 billion copies of magazines were issued, and 6.44 billion copies of books published. There were 3,982 archives in China and 56.26 million documents were made accessible to the public. However, it needs to be noted that official statistics are not accurate as there are no really accurate standards of measurement.

The Chinese government regulates the buying and releasing foreign programs, and the import of foreign TV programs and movies. In addition, the government also supervises Internet content. Otherwise, the Chinese government not only develops the domestic program market, but also co-cooperates with Hollywood Movies industries. The education organizations to train Chinese digital content staff in China include Beijing Movie College, Beijing Broadcasting and Animations College, Shanghai Art and Movies Training School and so on (Ministry of Economic Affairs Digital Content Industry Office 2004, 1-32 – 1-35).

Digital content industry development in China is now heavily emphasizing online games and e-learning industries. In 2003 the market scope in online games, PC, and mobile games was US$2.3 hundred million, US$2.3 million and US$8.9 million respectively. The average growth rate of the Chinese games market from 2003 to 2008 was projected at 44.9 percent. The Chinese government has played, and will continue to play a leading role in managing online games.

China places an emphasis on distance learning because of the large size of the country and the need to educate its entire people.

The Digital content industries’ total output in Shanghai alone was US$ 0.98 billion in 2003 .The largest industries are content software industries, next are digital application industries, and following this are mobile content industries. The total output is projected to reach US$ 7.41 billion in 2010. Digital content clusters have been established with the

223 support of preferential policies, especially in the Zhabei area (part of the Pudong new area).

Taiwan

Broadband telecommunication infrastructure is critical for the production and distribution of digital content. According to A Summary Report of the January Survey of 2005 investigated by the Taiwan Network Information Centre (TWNIC 2005), 65.02 percent (4.60 million) of households in Taiwan have access to the Internet. About 83.51 percent (0.77 million) of households in Taipei city, and 83.18 percent (0.44 million) of households in Kaohsiung have access to the Internet. Following the two metropolitan areas, there are 69.74 percent (1.63 million) in Northern Taiwan, 57.13 percent (0.92 million) in Central Taiwan, 50.96 percent (0.90 million) in Eastern Taiwan, and the minimum is Southern Taiwan with 50.30 percent (76,000). 76.13 percent of households in Taiwan access the network via ADSL, followed by 10.57 percent via Paid Dial-Up Connection, and 4.61 percent via Cable Modem, then 1.88 percent via Free Dial-Up Connection. From the result of the survey, we conclude that 82.47 percent of the households in Taiwan use Broadband to access the Internet (Broadband here includes ADSL, Cable Modem, Leased Line, LAN and Community Network).

Following the Ministry of Economic Affairs Digital Content Industry Office classification (2004, 1-2 – 1-5), digital content companies in Taiwan are separated into eight categories: Digital Games, Computer Motion Pictures, Digital Learning, Digital Audio/Visual Applications, Mobile Content, Network Services, Content Software and Digital Publications and Storage. Firstly, this report will describe the present situation of Digital Content Industries in Taiwan and the framework of Taiwan’s Digital Content Industries (see FigureA3.1).

Taiwan also plays an important role in the global economy. Taiwan’s population is larger than that of over 140 United Nations (UN) member states. It is the world's 17th largest economy and 15th largest trading nation and its information technology industry is world famous. It is the world's largest producer of notebook computers, motherboards, and liquid crystal display monitors. In the World Economic Forum's Growth Competitiveness Report

224 for 2004, Taiwan was listed fourth among all countries, and first in Asia for the third consecutive year (Chen 2005).

The digital content industries in Taiwan exhibit some comparative advantages. Firstly, Taiwan has accumulated a creative talent base through the development of its IT industry. Second, Taiwanese companies have operational experience in the global digital industry value chain. Finally, Taiwan now has a democratic model of government and has relatively open markets. Importantly, Taiwan does function as a gateway for co-marketing relationships with foreign firms entering the Chinese market.

According to Ministry of Economic Affairs Digital Content Industry Office (2004), the total output value of digital content industries in 2003 was US$ 6.08 billion, an increase of 23 percent compared to US$4.71 billion in 2002. Digital learning industries increased 63 percent; network service industries 43 percent; digital game industries 38 percent; mobile content industries 34 percent and other industries 7~30 percent.

The number of digital content firms in Taiwan increased from 1,428 in 2002 to 1,730 in 2003. The most rapidly expanding industries are digital learning, network services, digital games and mobile content industries. The numbers of employees working in digital content companies has increased by 30 percent since 2002.The amount of Taiwanese digital content industry employees was approximately 43,000, and the export rate was 14 percent in 2003. (Ministry of Economic Affairs Digital Content Industry Office (2004, 1-7 – 1-8). The main regulation of digital content industries in Taiwan is the Regulation of Digital Content Industry Development. The government provides US$ 0.3 billion worth of favourable loans to digital content companies each year. Non-governmental organizations also invested about US$ 61.3 million dollars in 2003.

225 Content Content Material Education Culture Image Commercial Film Application

Music Entertainment Art Publication otn ovre Converge Content

iia otn rdc Product Content Digital

Digital Technique (Content Product, Standard, Data Information Compression, Special Efficacy, Image Operation…..) Technique

Digital Content Text Digital Digital Mobile Network Software Game Learning Content Service Image Music Audio Visual

Computer Digital Content Digital Motion Audio/Visual Software Publication Picture Application and Information Storage Technique

System Converge Converge System Distribute and Protect Technique (Digital Content Management, Broadband Management, Aggregate Internet Internet Service Value-add Technique, Copyright Management, Revenue Service Mode… Content Provide Service E-Commer Internet Service (Wireless and Cable) ce Service Security Service

Digital Content Service Service Content Digital Broadcast Software

Internet Cable TV Wirel ess Film Internet (PC) CATV TV Digital

ar Converge Carry Broadcast Satellite Communication Digital Satellite Digital Mobile Storage Communication Broadcast Network CD/DVD/...

Receive Set PC PC, TV, PDA ,Mobile Phone, Game TV Software…. PDA

Figure A3.1: Framework of Taiwan’s Digital Content Industry Source: Ministry of Economic Affairs Digital Content Industry Office (2004, 1-6)

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