The Darby Company is a medium-sized communications technology company headquartered on the west coast of the United


The Darby Company is a medium-sized communications technology company headquartered on the west coast of the United States. Among other things, Darby holds a patent on a mobile telephone that can operate effectively within a 5-mile radius. The phone does not contain stateof the-art technology, but it can be produced extremely cheaply. As a result, the Chinese government has expressed interest in manufacturing and selling this phone throughout its country.
Preliminary discussions with the Chinese government reveal some major terms of the agreement that it would like to include: 

(1) Darby will enter into a joint venture with a local Chinese firm to manufacture the phones to Darby's specifications; 

(2) These phones will be sold throughout China at a 100 percent markup, and Darby will receive 10 percent of the profits; 

(3) Darby will invest $35 million in building the manufacturing facility, and these costs will be recovered over a five-year period; and 

(4) The government in Beijing will guarantee that at least 100,000 phones are sold every year, or it will purchase the difference.
The Darby management is not sure whether this is a good deal. In particular, Darby executives have heard all sorts of horror stories regarding agreements that the Chinese government has made and then broken. The company also is concerned that once its technology is understood, the Chinese will walk away from the agreement and start making these phones on their own. Because the technology is not state-of-the-art, the real benefit is in the low production costs, and the technological knowledge is more difficult to protect.
For its part, the Chinese government has promised to sign a written contract with Darby, and it has agreed that any disputes regarding enforcement of this contract can be brought, by either side, to the World Court at the Hague for resolution. Should this course of action be taken, each side would be responsible for its own legal fees, but the Chinese have promised to accept the decision of the court as binding.
Darby has 30 days to decide whether to sign the contract with the Chinese. After this time, the Chinese intend to pursue negotiations with a large telecommunications firm in Europe and try cutting a deal with it. Darby is more attractive to the Chinese, however, because of the low cost of producing its telephone. In any event, the Chinese are determined to begin mass-producing cellular phones in their country. "Our future is tied to high-tech communication," the Chinese minister of finance recently told Darby's president. "That is why we are so anxious to do business with your company; you have quality phones at low cost." Darby management is flattered by these kind words but still unsure if this is the type of business deal in which it wants to get involved.

1. How important is the political environment in China for the Darby Company? Explain.
2. If a disagreement arises between the two joint-venture partners and the government of China reneges on its promises, how well protected is Darby’s position? Explain.
3. Are the economic and technological environments in China favorable for Darby? Why or why not?

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