The Journal of Applied Business Research – May/June 2014 Volume 30, Number 3 Copyright by author(s); CC-BY 793 The Clute Institute Does Strategic Alliance Matter In Managing Innovation In China? Li (Isabella) Liu, Royal Holloway College, United Kingdom Sajjad M. Jasimuddin, Kedge Business School, France David Faulkner, Royal Holloway College, United Kingdom ABSTRACT Innovation is the route to competitive advantage for a firm. In this regard, strategic alliances, particularly international joint venture (IJV), is an effective vehicle for creating innovation capabilities. This paper attempts to explore innovation activities in IJVs between Chinese and Western companies. China is currently largely an OEM country that supplies the whole world with a wide variety of products. However it still lacks a higher level of innovation. The paper reports a qualitative study conducted at two Sino-Western IJVs about how IJVs can help Chinese companies to become innovative. China has easy access to foreign technology, but is weak in its domestic clustering of technology infrastructure. Sino-Western joint ventures are found useful in creating transferable innovation in China. The paper suggests key success factors for creating innovation capabilities through IJV formation. Keywords: Innovation; IJVs; China; Innovative Capabilities; Innovative Network; Intellectual Property; Open Innovation; Strategic Alliances 1. INTRODUCTION hina’s inward foreign investment has developed at a rapid rate during the last 30 years, thereby gaining a path of breathtaking economic growth. For example, in 2004, its GDP reached $1.64 trillion in absolute dollar terms, making it the sixth largest economy behind the US, Japan, Germany, Britain, and France (Xu et al., 2006). Strategic alliances, which Culpan (2009) defines as a variety of interfirm partnerships between and among firms to gain a competitive advantage, plays a great role for the China’s rapid economic growth. The fact is that strategic business alliances have increased in number in today’s global business environment (Culpan, 2009). International Joint Ventures (IJVs) have recently become an increasingly important mode of foreign entry into host countries, including China. While the Western company’s motivation is generally to gain access to a vast market of 1.3 billion people, and to manufacture at the low labour costs that exist in China, Chinese partners intend to gaining access to Western technology and management as the normal motivation. China has been the subject of a large amount of media and academic interest particularly over the last ten years, since it has become apparent in the West that China is rapidly becoming a world economic power. In the area of manufacturing it seems to provide a large percentage of the world’s traded and manufactured products , most of which appear under well-known Western brand names (Gu, 2005). Although China is currently an Original Equipment Manufacture (OEM) country that supplies the world with a mass of products, it intends to transform itself into a brand name country (Gu, 2005). The fact that innovation is a powerful enabler, because a firm with greater innovativeness will be more successful in creating value and enhancing competitive advantage. The purpose of this paper is to discuss how IJVs can help Chinese companies to become innovative, by exploring and identifying innovations in two IJVs based in China. The paper is structured as follows: Section 2 reviews the relevant literature, followed by Section 3 that focuses on methods used to undertake a qualitative research. Various factors related to innovation activities in China are identified in Section 4. Section 5 discusses the interactions of the forces involved that seeks to improve innovation capability in China. The final section provides the concluding remarks with a discussion of limitations, and directions for future research. C