Foreign investment in China used to be restricted largely to alliances with struggling state-owned companies. The results were mixed, and some high-profile failures gave alliances a bad name. Recently, however, foreign companies have been allowed to run their own enterprises in certain sectors,¹ and they will soon be able to do so in several others as well.²

For both foreign and Chinese investors, wholly owned ventures are, on average, more profitable than alliances (Exhibit 1). Yet in 2002, alliances attracted roughly half of China’s record $55 billion in new foreign direct investment, and many companies expect to pursue more alliances. How come? It’s not just because they remain the sole way to invest in the life insurance, securities, and telecommunications sectors. Our research shows that, in many cases, they perform quite well. Indeed, if alliances are carefully chosen and skillfully run, they can be just as financially rewarding as wholly owned businesses.

In the six months to March 2003, we surveyed 31 companies in five industry sectors—automotive, basic materials, consumer goods and pharmaceuticals, energy, and high-tech and telecommunications—to learn about the goals, partnership structures, and past performance of the 400-odd alliances these companies have...