Joint Venture Literature Review k Fling 2007

8/17/2019 Joint Venture Literature Review k Fling 2007

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Joint Venture Review - Working Paper Åsa Käfling

Construction and Reconstruction

of Joint Ventures in the Literature

Åsa KäflingPh D Student, M Sc

Linköping University


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Joint Venture Review – Working Paper

1. Theoretical Perspectives and Joint Ventures ............................................................ 52. Literature Review of Joint Venture Research ........................................................... 73. Planning to Invest ...................................................................................................... 8

3.1. Choice of Entry Mode ....................................................................................... 83.1.1. Joint Ventures vs. Mergers and Acquisitions ............................................... 93.1.2. Joint Ventures vs. Wholly Foreign Owned Enterprises ......................... 11

4. Establishing a Joint Venture.................................................................................... 124.1. The Negotiation Process ................................................................................. 12

4.1.1. Partner Selection ...................................................................................... 124.1.2. The Joint Venture Contract .................................................................... 14

4.2. The Struggle for Control.................................................................................. 144.2.1. Management of Control ......................................................................... 15

4.2.2.

Split Management Control and Dual Parent Perspectives...................... 18

4.2.3. Motives behind Joint Ventures ............................................................... 204.2.4. Motives behind Joint Ventures in Developed Countries ....................... 204.2.5. Motives behind Joint Ventures in China ................................................ 21

5. Operations in Joint Ventures .................................................................................. 215.1. Learning ............................................................................................................ 22

5.1.1. Prerequisites for Learning ........................................................................ 225.1.2. Learning Processes - Successful and Unsuccessful .................................. 23

5.2. Human Resources Management and Leadership ........................................... 245.2.1. Human Resource Management in International Joint Ventures.......... 24

5.2.2. Human Resources Management in China .............................................. 246. Evaluating Joint Venture Performance .................................................................. 266.1. Performance Perspectives ................................................................................ 276.2. Factors Influencing Joint Venture Satisfaction .............................................. 29

6.2.1. External Environment.............................................................................. 296.2.2. Partner Cooperation ................................................................................ 296.2.3. Culture and History ................................................................................. 30


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6.3. Factors influencing Survival, Duration and Stability ...................................... 306.3.1. Equity Share.............................................................................................. 316.3.2. External Environment.............................................................................. 31

6.4. Factors Influencing Financial Returns ............................................................ 32

6.4.1. Type of Joint Venture.............................................................................. 326.4.2. Partner Selection ...................................................................................... 32

6.5. Problems in Joint Ventures ............................................................................. 336.5.1. Conflicts between the partners ................................................................ 336.5.2. Conflicts within the joint venture company .......................................... 346.5.3. External Influence .................................................................................... 35

7. Joint Ventures – A Story of Success or Failure? ..................................................... 36References......................................................................................................................... 37


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Summary

This working paper deals with issues related to international equity joint ventures

(called joint ventures in the paper), both in developed countries and in less developedcountries. Joint ventures in China are especially in focus, since China has become the

second largest recipient in the world for foreign direct investments; and joint ventures

being vital for foreign investments in China.

The paper consists of two parts; the first part is an account of the theoretical

perspectives that have been used in studies of joint ventures. Here the most emphasis is

on describing transaction cost theories and resource based theories, as the dominant

perspectives within the joint venture research field. The other two perspectives; bargain

power and institutional theory are only roughly outlined in the paper.

The second part, and main focus of the working paper, is a review of the literature

of the joint venture research field. This review is based on analysis of 259 articles about

joint ventures published in the 15 most influential1 management research journals

between the years of 1990 and 20042. The findings from these articles are compared to

results from previous works and presented chronologically in the literature review. Firstly

the joint venture decision, or entry mode discussion, is described. Then the planning

phase with partner selection, negotiation process and completing the joint venture

contract is studied. The influence of control in joint ventures is discussed; as well as the

importance of motives behind the decision to establish a joint venture. Then the

operations phase of the joint ventures, including intra-organizational dimensions like

human resource management, learning and trust, is accounted for. Finally, the evaluation

phase, where the joint venture performance is measured, is analysed in depth.

Performance is seen through the perspectives of joint venture satisfaction and goal

accomplishment, financial returns, and joint venture stability and survival. To summarizethe working paper, the issue of the assumed high rate of joint venture failure is addressed.

1 According to the database ISI Journal Citations Report2 For a more comprehensive description of the research methods used please contact

the author


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1.

Theoretical Perspectives and Joint Ventures

Joint venture theory can be viewed from at least four perspectives; transaction costtheory, resource based theory, bargain power theory and institutional theory.

Transaction cost theories typically are applied when discussing choice of entry mode in

markets; or why companies co-operate. According to Williamson (1975) transaction costs

are attached to all economic activities. How companies design their activities; through

markets or hierarchies, reflects the most economical mode of organizing (Williamson,

1975). The objective of the firm is to economize the transaction cost through the choice

of an appropriate governance structure (Tsang, 2000). The strategy to enter a market

through a strategic alliance can consequently be seen as an alternative mode to a market

transaction. From the transaction cost perspective companies engage in joint ventures

when this form of cooperation is more efficient in order to govern than other forms of

investments (Mjoen & Tallman, 1997) as a result of costs related to mistrust or market

failure (Hennart, 1988). As a result of transaction cost theories being the dominant

perspective in the joint venture field it has set the agenda for joint venture research. Many

articles consequently deal with issues related to opportunism and distrust; there are for

example numerous articles about control and conflict. Other articles building on the

transaction cost framework cover issues like; ambiguity and autonomy (Butler & Sohod,

1995) opportunities and trust (Madhok, 1995) and how asymmetric information and

indigestibility (Reuer & Koza, 2000) in joint ventures are inter-related. How joint

ventures evolve and terminate over time (Jeffrey, 2001) through divestment or acquisition

(Chi, 2000) has also been studied.

However, the use of transaction cost theories to explain the establishment and

performance of joint ventures has been criticized. Firstly, the efficiency of the joint

venture form is questioned by claims that joint ventures are less efficient than traditional

hierarchies. The background to these inefficiencies are the conflicts between the partners,

factionalism within the management team of the joint venture, and the political


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dimension of the joint venture environment (Pearce, 1997). The argument that many joint

ventures are terminated through partner buy-out is also used to supports this view.

The use of transaction cost theories to explain joint ventures has also been criticized by

researchers that are skeptical to the validity of the perspective per se. The reason why the

joint venture form seems to be inefficient, according to Tsang (2000), is because only the

cost side and not the benefit side of the transaction is taken into account. As a result many

recent researchers advocate a resource based perspective when studying joint ventures.

Joint venture literature with a Resource Based approach is often concerned with motives

behind the alliance. Instead of the costs related to the choice of entry mode theses articles

investigate how alliances are used as a means to achieve resources. Penrose (1959)

describes a company as a collection of resources, and profits as a result of the company’s

capacity to cultivate them (Penrose, 1959). The biggest differences between the

transaction cost perspective and the resource based perspective are, according to Tsang

(2000), that transaction cost theory has a more narrow focus and only concern the costs

directly related to the transaction. The resource based perspective takes into account not

only the costs directly related to the transaction, but also the result on the other recourses

in the firm. In addition, the recourse based perspective put emphasis on the resources thatare embedded in the external context of the firm. (Tsang, 2000)

Bargain Power Theory is mostly used when studying joint venture negotiations and

learning processes within the joint venture. The reason for bargain power theories being

applied when studying learning processes is because learning and knowledge acquisition

change the distribution of bargain power between the partners in the joint venture.

(Hamel, 1991)

From an Institutional Theory Perspective strategic alliances are viewed as a societal

phenomenon. Examples of studies are articles about trends influencing the number of

alliances (Glaister & Husan, 1998; Osborn, Hagedoorn, Denekamp, Duysters, & Baughn,

1998).


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2.

Literature Review of Joint Venture Research

Joint venture articles can be divided into three categories according to their focus on the joint venture process.

Figure 1 Three Phases of Joint Venture Studies and Foci

Firstly many issues related to the planning of a joint venture are studied, like choice of

entry mode and how to negotiate. These studies are mostly inter-partner focused, and

discuss the best prerequisites for a successful alliance. Most of the theory in this field

derives from quantitative hypotheses testing of secondary data. Qualitative longitudinal

case studies are rare.

Articles about the operations in the joint venture are more process focused. Here the

relationship between the different members (of the partners) in the joint venture is

studied. Examples of issues covered are cross-culture management and human resource

management. Even though there are several examples of articles within these disciplines

using qualitative methods (mostly case studies) the majority of articles are quantitative.

The number of articles concerning the joint venture operations is considerably lower than

articles about the planning and/or evaluation of a joint venture.


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Correspondingly, the number of articles about evaluation of joint ventures is high. Most

of these articles are concerned with how well the objectives and goals of a partner have

been met in the joint venture. Other popular themes are joint venture stability, survival

and financial performance. The bases for and measures of evaluation often differ between

the articles, and this has lead to confusion. The vast majority of theories from this field

derive from quantitative studies that are based on statistically processed survey data.

3.

Planning to Invest

Before a company decides to access a new market there are several important issues to

consider. The most important decision to make is the choice of entry mode or more

specifically the level of desired control over and flexibility of the investment. It is

important to understand that different countries, and industries, can impose restrictions on

investments. In many developing countries foreign companies have no other choice than

co-operating in joint venture form with local partners.

3.1. Choice of Entry Mode

Studies about entry modes are not focused on joint ventures per se. Instead joint ventures

are compared to other strategic moves e. g. mergers and acquisitions and comparisons are

made between the different forms and/or passivity (Hagedoorn & Sadowski, 1999;

Hennart & Reddy, 1997; Hennart & Reddy, 2000).

Other studies discuss why some companies chose to engage in joint ventures while othersestablish wholly foreign owned enterprises (Chang & Singh, 1999; Chi, 2000; Kent,

1991).


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A few studies try to problemize alliance formation by discussing how the factors of

industry embeddedness and imitation interact when companies decide to form strategic

alliances (Osborn et al., 1998; Reddy, Osborn, & Hennart, 2002). Another problemizing

attempt are studies of conflict as a result of sharing property rights in an alliance, and

whether companies choose different contractual forms of cooperation depending on

whether the alliance is domestic or international (Garcia-Canal, 1996).

The choice of whether to cooperate in a joint venture or establish a wholly owned

enterprise has been discussed, especially for companies investing in the developing

countries in the world. Political unrest, legal implications and the infrastructural situation

of a country are but a few of the relevant factors when considering entering these

markets.

3.1.1.

Joint Ventures vs. Mergers and Acquisitions

The vivid discussion about “when to ally and when to acquire” that has been pursued in

the Strategic Journal of Management started with a general article about joint ventures,

seen from the transaction cost theory perspective, written by Hennart in 1988. In this

article he uses transaction cost economics to explain establishment of equity joint

ventures3 which he divides into two groups; scale joint ventures and link joint ventures

(Hennart, 1988).

Hennart (1988) defines scale joint ventures as joint ventures between parent companies

that are carrying out the same strategy through the establishment; for example as a means

of vertical integration. Link joint ventures are joint ventures that constitute a different

strategy for the different partners. An example of this is that a joint venture can beviewed as vertical integration for one partner and horizontal expansion for the other(s).

The findings also show that the strategies behind scale joint ventures and link joint

ventures are different: Scale joint ventures are established as an instrument to internalize

3 He does not include joint ventures that are a result of legislation in the study


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a failing market when full ownership is inefficient. Link joint ventures are instead

established when an acquisition of one partner, by another, is afflicted by too high

management costs (Hennart, 1988).

In the next article in this field, by Balakrishnan et al (1993), the discussion about joint

ventures vs. acquisition is more articulated. The authors write that companies choose to

engage in joint ventures “when the costs of valuing complementary assets are non-trivial”

(Balakrishnan 1993; p99). Consequently, joint ventures are preferred to acquisitions,

when the companies belong to different industries. Acquisitions are instead expected

when the companies are active in the same industry.

Hennart et al (1997) continue the discussion by introducing the term “digestibility”. They

summarize four reasons for why joint ventures are preferred to acquisitions; indivisibility

(when a desired asset is hard to disentangle from non-desired assets), management costs

(from integrating employees from the acquired company), assessment difficulties (the

result of valuation difficulties) and institutional (and governmental) barriers (Hennart,

1997). In their empirical investigation they failed to support that joint ventures are chosen

as a result of valuation difficulties, the hypotheses that originated from Balakrishnan et al

(1993), but supported that joint ventures are chosen when desired assets are embedded

into organizations thus making the acquisition indigestible.

As a response, Reuer et al (2000) argues that the asymmetric information view

(assessment difficulties) and the indigestibility view are complementary and interrelated.

They conclude that indigestibility can even be a result of asymmetric information (Reuer,

2000). The differences in their findings compared with Hennart et al (1997) are explained

mainly by the empirical settings of the different articles; since the study conducted byHennart et al (1997) only covers Japanese companies entering USA. Hennart et al (2000)

reject this explanation and present further support for their view (Hennart, 2000).

Even though the heated debate about joint ventures vs. acquisitions has lead to a broader

understanding of the driving forces behind different entry modes, there is still one major


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disagreement between the two groups of authors; whether companies from different

industries choose to ally or if they prefer to acquire (Hennart, 2000).

3.1.2.

Joint Ventures vs. Wholly Foreign Owned Enterprises

In many countries, especially in the developing world, companies are forced to cooperate

in joint ventures if they want to establish themselves into the market. The discussion

about whether to engage in a joint venture or establish a wholly owned enterprise as an

entry mode has consequently differed from the discussion about joint ventures vs.

mergers and acquisitions.

Most studies that discuss whether a company should cooperate in a joint venture or

establish itself in a wholly owned subsidiary consequently focus on less developed

markets which slowly are deregulated. That holds especially true for choice of entry

mode to China where joint ventures traditionally have been an extremely popular form of

entry.

In recent years Sino-foreign joint ventures have however lost some of their attractiveness.

There are, according to Deng (2002), three main reasons for this change. First, many

western enterprises are not satisfied with the results of their joint ventures in China

(Deng, 2002; Pan, Vanhonacker, & Pitts, 1995; Si & Bruton, 1999). Sino-foreign joint

ventures are generally known to be hard to manage (Beamish, 1985) resulting in conflicts

about control. Besides this, the objectives of the partners often differ from each other,

something that deepens the conflicts. Wholly foreign owned companies are thus seen as a

better alternative to equity joint ventures due to control issues, and are subsequently

favoured by many investors. Last, but not least, the legislation regulating wholly foreignowned companies in China has changed in a more positive direction as a concession to

the World Trade Organization (Deng, 2002).

There are despite this development indications that the preference for wholly owned

companies, at the expense of the joint ventures, is beginning to change; recent studies


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show that joint ventures in China are more profitable (Pan & Chi, 1999) than wholly

owned companies.

4. Establishing a Joint Venture

When a company has decided to engage in a joint venture there are many strategically

important issues that must be considered. First a suitable partner for the joint venture

must be found. Partner selection is especially important since the characteristics of the

partner are known to have a major impact on the level of future satisfaction. The choice

for companies engaging in joint ventures in developing countries can in reality beextremely limited; as most western companies engaged in joint ventures in China can tell.

4.1.

The Negotiation Process

Many joint venture studies concerned with the planning of joint ventures describe how

the negotiation process between the parent companies of joint ventures can be designed.

Most studies have a broad negotiating focus even though a few are narrowing it down to

the transaction (Pearce, 1997) or the contract (Garcia-Canal, 1996; Luo, 2002).

4.1.1.

Partner Selection

The first attempts to summarize the factors influencing partner selection in international

joint ventures were undertaken in the late 80s. Harringan (1985) emphases the

importance of strategic fit between the partners; constituted by complementary goals,

resources and management capabilities (Harrigan, 1985).

Geringer (1988; 1991) acknowledges the importance of strategic fit; but concludes that

prior research have had “limited success” when identifying criteria for joint venture

partner selection. He is the first to distinguish between task related and partner related


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selection criteria; as a tool to understand the selection process. Task related selection

criteria are defined as the general resources and skills organizations need for their

operations. Partner related selection criteria are defined as those unique to multi partner

organizations (Geringer, 1988; Geringer, 1991).

Geringer (1991) further argues that the parent managers must analyze both the current

situation, as well as the future, when taking partner selection decisions. In order to

succeed with the selection process, a company must be aware of its own capabilities and

determine if the parents together possess the necessary capabilities for the joint venture to

succeed. He concludes that partner selection is an important issue that has received scarce

attention from the joint venture researchers (Geringer, 1991).

As a response to Geringer (1991), a study of joint ventures in Britain was conducted by

Glaister and Buckley in 1997. They aimed to use his framework and replicated his study

in a different context. Their result is however more specific than Geringer’s since they

attempted to identify the most important task- and partner related selection criteria.

Among the task related selection criteria Glaister et al (1997) classify knowledge about

the local market , distribution channels, links with major buyers, and knowledge about the

local culture as the most important criteria. Trust between the partners and relatedness,

good reputation and financial situation are found to be the most significant partner

related factors (Glaister & Buckley, 1997).

Glaister and Buckley’s study became heavily criticized, mostly by Geringer himself. In a

reply Geringer writes that the results “are subject to low reliability, questionable validity,

non-equivalent measures, and related concerns” (Geringer 1998; p125). The low

response rate, 24 %, and the fact that other non related material later became added totheir study rendered the most unfavorable review. (Geringer, 1998)

Glaister et al (1998) later reworked their data according to some of the suggestions they

received. The results they got were, however, not very different from those of their initial

article and they did not share the concerns voiced by their reviewer. What the two studies


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eventually did agree about is the importance of further research in the field, and that

importance of using both qualitative and quantitative methods when conducting research.

4.1.2.

The Joint Venture Contract

The main purpose of the joint venture contract is to provide a structural framework for

the joint venture company in order to avoid opportunism and moral hazards. The contract

reduce the role ambiguity and role conflict for joint venture managers (Shenkar & Zeira,

1992), since it provides guidelines for co-operation between the partners and information

about each partner’s responsibilities and rights. The main contract typically include;

general provisions of the joint venture company (like the name of the joint venture parties

and the joint venture company), the scope, scale and objectives of the joint venture

operations, the level of investments (capital contribution of the parties), evaluation

through accounting and auditing, future profit sharing, the composition of the board and

joint venture management group, the joint venture’s labor policy, settlements of disputes

(including alteration of contract), applicable laws, which language that should prevail in

case of discrepancies, and the measures taken when terminating or renewing the joint

venture.

The design of the contract is important since it regulates the level of cooperation and

control and how performance should be evaluated. A complete contract is to a certain

extent also shown to result in a higher level of performance, and better co-operation. It is,

however, important that a certain level of flexibility is left so managers can take decisions

in the day to day work; the partners should consequently refrain from writing too many

specifics into the contract. (Luo, 2002)

4.2.

The Struggle for Control

The issue of control has received much attention from scholars studying strategic

alliances. The first articles on joint ventures and control were published already in the


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late 1950s. Tomlinson (1970) contributed to the field with empirical studies, even though

he did not study control per se but the parents’ attitude toward control in joint ventures

(Tomlinson, 1970).

Most of the first studies were concerned with how control is related to financial

performance (e. g. return on investment) (Tomlinson, 1970) and stability (e. g. changes in

ownership of a joint venture) (Franko, 1971). These pioneer works broke new ground

within the joint venture field, but the authors neither defined control nor did they explain

how control can be measured. The first articles about control and joint ventures, of real

influence, were written in the mid 1980s.

4.2.1.

Management of Control

In Killing (1983) dominant parent ventures, shared management ventures and

independent joint ventures are defined as three distinct types of joint ventures. Here

control is exercised through the governance structure. In a dominant parent venture one

partner takes active part in the management of the joint venture, while the other is passive

(a so called sleeping partner). The joint venture board of directors, chosen by both partners according to the equity share of the joint venture, has little authority. Instead the

dominant partner empowers its own managers (that could, but must not, be localized to

the joint venture) to take decisions in strategic and operational issues. The general

manger of the joint venture reports to the dominant partner instead of acting as the chief

executive officer.

In a shared management venture both (or all) partners take active part in the management

of the joint venture. The general manager of the joint venture mainly reports to the board

of directors; a board that consequently has more authority.


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An independent venture is a joint venture with little interference of its parent

organizations. The general manager views the joint venture as an independent company

and the relationship to the owners are mainly financial. (Killing, 1983)

Killing’s empirical studies show (in consistence with the dominant transaction cost

perspective) that a dominant partner joint venture is more likely to succeed4, since it is

easier to manage than the other forms of co-operation.

In Geringer et al (1989) control instead is studied within the joint venture. Three

dimensions of control are defined; control as a mechanism, extent of control and control

focus (or scope of control). These three dimensions reflect different aspects of control.

Studies of control as a mechanism, instead of control as a result of a governance

structure, focus on how control is exercised. The extent of control derives from the extent

to which the partners implement control, instead of equity share. The scope of control

defines in which area in the joint venture operations that control is exercised. Because no

consensus has been reached about how different aspects of control (or performance)

should be investigated; the results of the previous studies diverge. (Geringer & Herbert,

1989)

Parkhe (1993) concludes regretfully that not only the performance and control issues lack

a comprehensive theoretical framework; but is surprised of “the extent to which current

empirical IJV research which boasts a large number of methodologically impeccable

studies fails to address concepts that are theoretically deemed central to the IJV

relationship”. (Parkhe 1993; p227 emphasis in original)

As a reply to Parkhe’s critique, and Geringer et al’s request of consensus, several controlrelated studies with an integrative approach were published. The first qualitative study

4 Killing (1983) defines joint venture performance as the management’s opinion

about joint venture performance. That is because there are no objective measures of

performance in joint ventures (a partner’s profitability is based on transfer prices

and management fees among other things)


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within the field is Yan and Gray (1994) where power, management control and

performance are liked together. The outcome of their case studies, of four joint ventures

in China, gave several additional findings. Firstly, their findings support the view that

equity share not is the same as management control. In all four joint ventures in their

empirical study the equity division had been voluntarily decided between the partners.

Their findings further support that a shared management structure is beneficial in

developing countries. They could not see, however, that performance was negatively

influenced by foreign dominance. In the conclusions part of their article a question about

the importance of the Chinese characteristics (of the joint ventures they studied) is

voiced. As authors before already had noted in previous studies (Beamish, 1985) the

motives behind Sino-foreign joint ventures were different between the foreign and the

Chinese partners. (Yan & Gray, 1994) This remark was a mere observation, as they did

not make any deeper attempt to investigate the relationship between goal incongruence

and control.

Another integrative attempt is Mjöen and Tallman (1997). Here control vs. performance

is studied through three theoretical lenses; transaction cost theory, bargain power theory

and institutional theory. In order to gain a deeper understanding of the control

phenomenon they relate actual equity share, control over specific activities, over all

control, bargain power and relative contribution of resources to each other. Their findings

show that relative contribution of resources correlates with bargain power. Bargain power

on the other hand correlates with perceived performance. The contribution of strategic

resources promote over all control, which in turn is related to perceived performance.

Equity share does not, however, influence neither control over specific activities nor

overall control. (Mjöen & Tallman, 1997)

The issue of control is especially common in the in the Sino-foreign joint venture

research field. For example Child et al (1999) give two recommendations to foreign

companies wanting to attain over all control of their joint ventures. First a foreign partner

should contribute to the joint venture with key resources since control of vital resources

(e.g. technical know how, managerial knowledge) is a way to guarantee authority in the


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company. The second recommendation is (contradictory to Mjöen and Tallman’s finding)

to increase the equity share in the joint venture as a way to achieve formal power. (Child

& Yan, 1999)

4.2.2.

Split Management Control and Dual Parent Perspectives

Previous studies acknowledge that joint ventures in developed and developing countries

are established out of different motives (Beamish, 1993, 1998; Child et al., 1999; Yan,

1998) and reveal a complicated relationship between bargain power, equity share and

control (Mjöen et al., 1997). These studies thus prepared the ground for the theories about

split management control (Choi & Beamish, 2004) and dual parent perspectives (Luo,

Shenkar, & Nyaw, 2001) on control that were to come.

Luo et al (2001) continue the discussion about the differences between over all control

and specific control; and like Child et al (1999) they use the Chinese market as their

empirical setting. They also find the control issue to be of great importance. Their results

are different from previous studies in the way that they find that the foreign partner and

the local partner aim to reach different objectives with their request for control. Foreign

companies were more likely seeking to attain over all control than the Chinese partners.

Over all control is the means to direct the whole range of activities in joint ventures; and

is seen as a necessity for companies wanting to gain efficiency, reputation and

profitability from the joint venture. Over all control is however more costly than specific

control5. Specific control is viewed as a way to assure special needs (e. g. skills- and

knowledge acquisition) and was consequently of more interest for the Chinese companies

compared to their foreign counterparts. (Luo et al., 2001)

Using the framework stated by Killing, Choi and Beamish (2004) suggest a new

dimension in order to solve the long standing conflict on whether foreign dominant

5 This is according Luo et al (2001) a result of higher costs related to budget

preparation, executive time, more expatriate managers etcetera


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partner ventures are more successful than shared management ventures. They suggest that

split control ventures should be added as an alternative to dominant partner ventures,

shared management ventures and independent joint ventures.

Split control ventures are joint ventures where the partners agree to control specific

activities. In this way split control ventures are different from shared management

ventures where all control over activities are shared between the partners.

Split control

JVs

MNE partner-

dominant JVs

Local partner-

dominant JVs

Shared

control JVs

High

Low High

An MNE par tner ’s

control exercised over

its own firm-specific

advantages

An MNE par tner ’s c ont rol exerc ised

over a local partner’s firm-specific

advantages

Split control

JVs

MNE partner-

dominant JVs

Local partner-

dominant JVs

Shared

control JVs

High

Low High

Split control

JVs

MNE partner-

dominant JVs

Local partner-

dominant JVs

Shared

control JVs

High

Low High

An MNE par tner ’s

control exercised over

its own firm-specific

advantages

An MNE par tner ’s c ont rol exerc ised

over a local partner’s firm-specific

advantages Figure 2 Four ways of partitioning control between JV partnersSource: Modified model, adapted from Choi and Beamish (2004: figure 1)

Their results, based on empirical studies of international joint ventures in Korea, show

that managers are more satisfied with the performance of split control joint ventures; than

shared management ventures or dominant parent joint ventures. Their findings could

however not indicate whether shared management ventures performed better, or worse,

than dominant parent joint ventures.(Choi et al., 2004)


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4.2.3.

Motives behind Joint Ventures

As a result of the discussion about over all versus specific control, motives in joint

ventures have received a growing interest from researchers. Fulfillment of goals has

recently become an important way of measuring joint venture performance, something

that will be discussed later in this paper.

The strategic objectives of joint ventures can be summarized into seven broad categories.

Joint ventures are used as a means to: reduce risk, achieve economics of scale and scope,

support technologies and/or patents, block competitors, overcome trade barriers, expand

internationally and integrate vertically with a partner. (Contractor & Lorange, 1988;

Contractor, 1986)

The motives behind joint ventures differ, however, between companies from the

developed and the developing world. Joint ventures between companies from developed

countries are formed because of the will to share investment risks and archive economics

of scale. Developed country companies establishing joint ventures together with

partner(s) from less developed countries are instead interested in overcoming trade and/or

governmental barriers in order to access local markets and to integrate vertically

(Contractor et al., 1988; Contractor, 1986). Utilization of joint ventures in less developed

countries, like China, is also a means to reduce risk (Calantone & Zhao, 2001).

4.2.4.

Motives behind Joint Ventures in Developed Countries

The joint venture form is by many companies, especially those operating in joint ventures

in USA, Europe and Japan, seen as a tool for knowledge acquisition (Makhija & Ganesh,

1997) and empirical studies show that knowledge acquisition (Lyles & Salk, 1996) and/orknowledge creation (Inkpen & Dinur, 1998) take place in joint ventures. Empirical

studies further show that knowledge acquisition is positively related to joint venture

performance (Lyles et al., 1996)


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For many companies the opportunities for learning and knowledge acquisition is the

primary motive when engaging in joint ventures. To share costs and risks related to

research and development are also important motives behind joint ventures; especially in

the aircraft, telecommunication and pharmaceutical industries (Mowery, Oxley, &

Silverman, 1996). Joint ventures that are formed in order to acquire industry related

capabilities, or adjust to rapid environmental changes, tend to be divested when the

organizations have achieved their required objectives (Makhija et al., 1997).

4.2.5.

Motives behind Joint Ventures in China

The main objectives for western companies (engaging in Sino-Foreign joint ventures in

China) are to get access to the Chinese market and to obtain cheap labor (Child, 1994).

Chinese companies desire to gain scientific knowledge, as well as western managerial

skills, through the partnership (Child, 1994; Shenkar & Li, 1999; Yan et al., 1994).

Si et al (1999) have developed guidelines for knowledge acquisition in Sino-western joint

ventures. They divide knowledge and learning into three separate parts: knowledge about

governmental issues, cultural understanding and market related knowledge (Si et al.,

1999). Their findings suggest that even though both the Chinese partner and the western

partner want to acquire knowledge, the desired knowledge differs between them. The

Chinese partner wants to learn more about new technologies, new managerial styles and

how to manage capital in an efficient way. Western partners are interested in obtaining

knowledge about the Chinese market and culture as well as gaining insight into Chinese

governmental and legal issues (Si et al., 1999).

5.

Operations in Joint Ventures

Process studies in joint ventures are primarily concerned with organizational issues like

learning processes; or management of human resources in the joint venture. Other


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examples of issues studied are trust and commitment. The number of articles about

learning in joint ventures is vast; but few articles focus on other process dimensions for

example management of personnel in joint ventures or development of trust between

partners of the joint venture.

The large number of articles with a learning focus is probably a result of viewing learning

as a strategic goal and hence intimately connected to joint venture performance. The fact

that human resources studies are few is more difficult to understand; since management

of personnel is closely related to control and performance.

No gender studies are to be found, which is surprising considering the great interest

gender issues have received in other organizational contexts.

5.1. Learning

The process of learning has achieved much attention from joint venture researchers. The

vast interest is not especially surprising though, since many joint ventures (as described

before) are established as a means for knowledge acquisition; especially in the developed

world. Studies about learning in joint ventures mostly deal with prerequisites for learning

and how companies can design a successful learning environment.

5.1.1.

Prerequisites for Learning

According to Hamel (1991) there are six core propositions that must be taken into

account when outlining the inter-partner learning. Firstly the competitive situation for the

partners must be analysed. If the partners are in the same industry they might becompetitors; as well as collaborators. Secondly, the learning and bargain power of the

partners is important. The author even writes that “ A partner that understands the link

between inter-partner learning, bargain power, and competitiveness will tend to view the

alliance as a race to learn.” (Hamel 1991: p87) The intent partners have for learning, in

form of resource concentration, internationalization or substitution; are also important


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determents for knowledge acquisition. Transparency is a prerequisite of learning that

could be influenced through organizational design. Finally, the receptivity of the partners

is important in order to achieve learning.

5.1.2.

Learning Processes - Successful and Unsuccessful

How learning takes place in joint ventures is a complex phenomenon that could be

described as a combination of teleological and emergent processes (Doz, 1996).

Successful learning requires high partner commitment; a consequence of adjustment of

learning requirements, heightened expectations and decreased or stable suspicion towards

the partner. Unsuccessful learning is instead characterised by low commitment; in its turn

a result of the inability to adjust to task and process learning requirements; and instead

turning to search for hidden agendas, leading to higher suspicions and lower expectations.

(Doz, 1996) In practice, learning takes place through at least four critical processes:

technology transfer or sharing, interaction between the parents, transfer of personnel

between the parent company and joint venture and integration of joint venture strategy

and parent company strategy (Inkpen et al., 1998). The types of knowledge created

through the processes are different; when technology sharing gives explicit and

objectified knowledge, the knowledge achieved through the transfer of personnel,

(between the joint venture organisation and the mother company) is even though

conscious, mostly tacit. Parent interaction and integration of strategy can be both explicit

and tacit; a parent can for example incorporate the other parent’s management practises

into its organization, or gain access to the other partner’s network, giving both explicit

and objectified knowledge. Example of tacit knowledge that can be received through an

alliance is new visions for future operations. (Inkpen et al., 1998)

Another type of tacit and explicit knowledge that companies can achieve by working in

strategic alliances is the experience from the actual business deal. The advantages with

this experience are more obvious where the company returns to a specific country, or a

specific cultural context, to do similar business again (Barkema, 1996).


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5.2.

Human Resources Management and Leadership

If most learning related articles focus on joint ventures in the developed world the

opposite holds true for articles related to human resource management.

However, the total interest for human resource issues from scholars within the joint

venture research field is not very high (Björkman & Lu, 2001; Zeira & Shenkar, 1990).

That is somewhat surprising since joint ventures have a reputation of being difficult to

manage and since HRM, especially recruitment to senior positions, is closely connected

to control (Geringer & Frayne, 1990; Kabst, 2004).

5.2.1.

Human Resource Management in International Joint Ventures

The challenging issues of human resource management in international joint ventures,

compared to wholly foreign owned, have to do with management of the different

employee groups of the joint ventures and the differences in personnel practises (due to

parent characteristics) between the partners (Zeira et al., 1990). Another challenge,

visible in most international joint ventures, is to balance globally applied human resource

practises with local responsiveness.

5.2.2.

Human Resources Management in China

The importance of the political and cultural dimensions of human resource practises are

emphasised in articles about less developed countries. That holds especially true for Sino-

foreign joint ventures; since the political influence is strong in China. One source of

political influence in the joint ventures is the role of the trade unions; another is the

governmental control of residents’ permits (the so called hukou system) which regulates

labour movements in China. The cultural influence, especially the Confucian ideals of

loyalty (Xin, 1994), could be seen in the strong emphasis on relationship; sometimes

mere nepotism. Since western managers generally emphasises knowledge and skills over

relationship (Björkman & Lu, 1999), conflicts are inevitable.


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During the last few years there has been a change in direction from the pre-reform

practises to more standardized human resource principles. Differences that stem from:

type of operations, if the joint venture is a start up or is based on a pervious Chinesemanufacturing unit and groups of employees can nevertheless still be identified.

(Björkman et al., 2001)

The objectives of Chinese trade unions are very different compared to western labour

unions. Representatives for the trade union are supposed to support the management of

the company and report to the party. The hukou6 system identifies the 1, 3 billion Chinese

residents by their geographical place of abode (household registration); and categorizes

them into two administrative groups (rural or urban). The hukou system has two

purposes; to control internal migration flows in general and targeted groups of people in

particular (Wang, 2004).

As the trade unions and the hukou system indicate; the Chinese working life has

traditionally emphasised stability and harmony over efficiency and flexibility. Another

example of this is the idea of the iron rice-bowl (a Chinese idiom that refers to the pre-

reform system of life-time employment in the state sector) that is still, almost three

decades after the introduction of market economy reforms in China, deeply rooted.

Differences between western human resources management principles and iron rice-bowl

thinking can be seen in the attitudes towards labour contracts, rewards and incentives,

performance management and trade unions (Goodall & Warner, 1997); to name but a few

issues.

When it comes to recruitment there are big differences between the pre-reform systemand western human resource principles. Before the market economy reforms urban

workers had life-time employment and welfare was provided to them and their families

(Goodall et al., 1997). Work was provided, after graduation, by the work unit (the so

6 For a comprehensive survey of the hukou system see Wang (2004)


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called danwei). Chinese managers still have a preference of selecting employees directly

from the universities (Björkman et al., 1999) which indicates influence of the pre-reform

practises. Today the local governments do not, like they did before, exercise influence on

human resource practises; even if they urge joint ventures to comply with regulations

concerning social security and labour contracts (Björkman et al., 2001).

Rewards and incentives in the pre-reform system were based on age, party loyalty and

length of service. The differences between categories of workers were small and

performance bonuses did not exist (Goodall et al., 1997). Studies in Sino-Western joint

ventures show that the resistance towards performance based salaries is still strong and

that Chinese managers want to minimize differences in salaries between employees

(Björkman et al., 1999). Western HRM-managers on the other hand, emphasise

knowledge and skills over relationship and uses salary differences as an incentive for the

personnel, in order to improve results (Björkman et al., 1999).

Another result of the egalitarian ideal is the difficulties foreign companies traditionally

have faced when trying to convince Chinese employees to accept a promotion, especially

if it means supervision of colleagues (Child, 1991).

6. Evaluating Joint Venture Performance

Measuring and evaluating joint venture performance have been characterised by a

situation where no consensus about how performance should be defined (Dussauge &

Garrette, 1995 472), or who (Child, 2003) should define it, has been reached. Many

recent studies do however address these issues; and the need for an integrative theoretical

framework is widely acknowledged.


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6.1.

Performance Perspectives

Joint venture performance studies mostly investigate either the; involved managers’

opinion about the alliance, with so called subjective measures; or the stability (and/or

duration of the alliance) and/or the financial situation of the joint venture (Dussauge et

al., 1995) with so called objective measures . Earlier studies often used financial

measures e. g. growth and profitability; but they have become unusual (Child, 2003)

because of the assessment difficulties (a result of transfer prices and non-transparent

accounting). Another reason is that financial measures, like the stability (duration and

survival) measures, only cover a limited range of the stakeholders’ goals. Subjective

measures of satisfaction (level of goal achievement) have been correlated with the

objective measures of survival, duration and stability. The result shows that satisfaction is

strongly correlated to survival and duration; but that stability has little direct relationship

with joint venture satisfaction (Geringer & Hebert, 1991).

Most resent studies thus assess joint venture performance from the level of stakeholder

satisfaction. There are anyhow big differences in which constructs that are used in the

assessment of satisfaction, as well as which stakeholders that are included in the sample,

leading to ambiguity and comparison difficulties. Another difficulty is that the

differences of evaluation between joint venture management and the partner

organizations, something that is seldom considered. Joint venture satisfaction is

sometimes viewed from the partners’ executives’ perspectives and sometimes from the

joint venture general mangers perspectives which makes comparisons difficult.

For example, in Lee and Beamish (1985) performance is measured by the level of over all

satisfaction of the managing directors in the joint ventures. Mjoen and Tallman (1997)

use the perceived performance of a joint venture stakeholder from the (Norwegian) parentorganizations, in their sample. Luo (2002) instead measure the level of satisfaction with

the joint ventures as perceived by IJV top managers (not defining more exact than this) in

the areas of over all satisfaction, sales level, competitive position and profitability. In a


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later study performance is measured as level of satisfaction by general managers or

deputy general managers in joint ventures (Luo & Park, 2004).

The broadest approach when assessing joint venture performance is Child (2002). In this

study respondents in the parent companies’ head offices, joint ventures and intermediate

organisations are interviewed and asked to assess overall performance in not less than 14

different areas7. Economic performance is measured through the stakeholders’ opinions

about profitability, sales growth and market share (Child, 2002). In a later article Child et

al (2003) revise these measures and use profitability, growth, market share, technological

development and development of local staff and management, as measures of

performance. Child et al (2003) use the fulfilment of goals as criteria of parent

satisfaction with the joint venture. In this study the performance construct should

therefore be divided into two parts; the criterion of how well goals are met, and the

measures used for the assessment (Child, 2003). Earlier performance studies with focus

on fulfilment of goals are Yan (1994) and Pearce (1997).

It is consequently important to keep in mind the wide range of subjective performance

perspectives, and performance measures, when studying other issues and factors that may

have an impact on performance.

Objective measures of performance were, as noted before, common in earlier joint

venture studies (Child, 2003). The use of objective measures as indicators of joint venture

performance has however been criticized. Stability and duration measures are

problematic in the sense that longevity might not be the aim of the joint venture. If e. g.

learning is the motive behind the joint venture; the termination of a joint venture

agreement should not be seen as joint venture failure, if knowledge acquisition has beenestablished. (Hamel, 1991)

7 The 14 constructs are profitability, sales growth, market share, exports,

localization, quality of supplies, production efficiency, production quality,

technological development, development of local managers, development of local

employees, development of expatriate understanding, relations with governmental

authorities, quality of collaboration between the partners


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6.2.

Factors Influencing Joint Venture Satisfaction

Recent studies of joint venture performance have been focused on perceived satisfaction,

related to goal achievement. In the same way as joint venture satisfaction is contrasted to

earlier performance studier, the importance of control and equity for joint venture success

is no longer self-explanatory.

6.2.1.

External Environment

As a reaction to earlier studies (e. g. Killing 1983) that link foreign control and joint

venture performance Beamish (1985, 1993) argue that the real factor behind joint venture

satisfaction is not control, or degree of control; but the external environment. Since the

joint venture context in developed countries is different from developing countries; so are

satisfaction and control. The possibility to form a foreign-dominant joint venture in a

developing county is lower; and the political risk is higher. Beamish (1985) finds, in his

sample, that joint venture performance is positively correlated to local dominance but

negatively related to foreign dominance in a developed country. (Beamish, 1985) Other

findings in line with Beamish (1985) are found in Lin et al (1998).This study also refuses

Killing’s (1983) statement of joint venture success as a result of dominant foreign

partners and find (from a Chinese sample) that the relative power of the foreign partner

does not affect joint venture performance – but the way conflicts are solved (Lin &

Germain, 1998).

6.2.2.

Partner Cooperation

Joint ventures are dependent on the relationship between the partners, as well as between

the partners and the joint venture management (Luo et al., 2004). Cooperation

significantly contributes to performance; and the contribution is not decreasing as

cooperation increases (Luo, 2002). The assessment of performance can, however,

substantially differ between the partners. Asymmetric performance assessment can in


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these cases result in a distance between the partners; and too close cooperation between a

partner and the joint venture management team can be viewed negatively by the other

partner (Luo et al., 2004).

6.2.3.

Culture and History

Lin et al (1998) argue, through empirical studies in China, that two important issues

influencing joint venture performance and conflict resolution are cultural similarity

between the partners and the age of the joint venture. If the partners have similar cultural

backgrounds and cultural values there is a strong possibility of solving conflicts and

reaching joint venture success. The same holds true for the period of time the joint

venture has been in place. The longer the joint venture has lasted, the better the results,

due to organizational learning (Lin et al., 1998). Pan et al (1999) also find that older joint

ventures perform better than newly established, but explain this with first-mover

advantage and tax advantages offered to early investors in China (Pan et al., 1999).

6.3. Factors influencing Survival Duration and Stability

The influence of equity and ownership for joint venture stability has been emphasized in

many joint venture studies. There are three types of instability, related to changes in

equity, which can be distinguished8. Firstly a joint venture can be liquidated; meaning

that the operations are stopped and the company’s assets are sold. Secondly, the joint

venture can be sold (in total or in part) to one of the partners. Thirdly, the joint venture

can be taken over by an outside company. Dissolution rates are not directly related to

instability. There is according to Gomes-Casseres (1987) a widely spread

misinterpretation that joint ventures are more likely to be dissolved than wholly ownedcompanies. That is because the dissolution rate of joint ventures is seldom compared to

the rate of dissolution of other organizational forms (Gomes-Casseres, 1987). Or in his

words:

8 This is my own definition. There exist several slightly different definitions of joint

venture instability.


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“The importance of joint venture instability can be easily misstated if one ignores

the instability of alternative structures. […] Wholly owned ventures were in fact

more likely to end in liquidation than jointly-owned ones. But liquidation was not

an important source of instability in either case.” (Gomes-Casseres 1987: p98)

Instead joint ventures were somewhat more unstable than the wholly owned companies in

that sense that the equity division changed more often in joint ventures.

6.3.1.

Equity Share

To sum up, changes in equity share do not directly influence joint venture survival but

joint venture stability. Findings further suggest that joint ventures undergo ownership

changes as a result of the wrong choice of initial organisational form (or entry mode). In

the industries, or countries, where the joint venture form was the most popular entry

mode, equity changes resulting in wholly owned companies were the least likely. At the

same time the level of ownership changes transforming wholly owned companies to joint

ventures were the most likely in the industries and countries were joint ventures were the

dominant form of entry. (Gomes-Casseres, 1987) Later findings show that a joint venture

is more likely to be unstable if the equity is very unevenly divided between the partners

(Blodgett, 1992). Companies with equity levels of less than 20% are also more likely to

sell (their part of the) joint venture than partners with equity shares of more than 50%

(Dhanaraj & Beamish, 2004).

6.3.2.

External Environment

The external environment influences both stability and survival. In open economies a

partner contributing with technological know how is more likely to increase its equity, at

the expense of the partner(s). In economies with hard restrictions on foreign investments,

the local partner is instead more likely to increase its equity share regardless of resources

provided by the foreign partner (Blodgett, 1991; Blodgett, 1992).


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Environmental uncertainty, which is not a result of governmental pressure on foreign

actors, also influences joint venture survival and stability. According to Chung and

Beamish (2005) companies can respond to environmental uncertainty by taking

calculated risks. Companies that invest when a country has undergone an economic crisis

can seize opportunities hidden to the competitors (Chung & Beamish, 2005).

6.4.

Factors Influencing Financial Returns

Financial measures on joint venture performance were popular during the earlier years of

joint venture research. Since financial outcome is difficult to measure; as a result of

creative accounting principles and use of transfer prices, financial measures have become

somewhat unfashionable and are seldom used in recent studies.

6.4.1.

Type of Joint Venture

The first factor shown to influence financial performance is the type of joint venture. Luo

(1997) shows that joint ventures in China are more likely to be satisfactory, in terms of

financial return and sales growth, if the partners have related products and market

position. A partner’s capacity to incorporate the counterpart’s tacit knowledge also has an

impact on return on investment as well as over all performance and local sales (Luo,1997). Merchant and Schendel (2000) also find the type of joint venture to be influential.

Their result, however, suggests that shareholder value is influenced more by structural

factors than partner related factors. Abnormal returns are related to the relatedness of the

partner and joint venture. Other influential factors leading to abnormal returns are greater

size of the partners and high levels of research and development attached to the joint

venture (Merchant & Schende, 2000).

6.4.2.

Partner Selection

The organizing skills of the local partner are important when promoting organizational fit

and hence joint venture efficiency. Cooperation between the partners in the past reduces

risk and leads to more profitable joint ventures with higher export sales. The size of the


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local partner does not influence financial performance but has an impact on local sales; if

the local partner is a state owned enterprise (which is usually the case in China) it can

promote market development and enhance market power. (Luo, 1997). Foreign

companies operating in developing countries (especially China) have had difficulties to

influence partner selection. This is problematic, especially since selection criteria are

known to influence not only financial returns but also expansion possibilities, export

growth and over all performance (Luo, 1997).

6.5.

Problems in Joint Ventures

Many studies are concerned with problems in joint ventures. One explanation for this isthe frequent use of the transaction cost perspective, favoured by so many joint venture

researchers. Another explanation is the popular opinion that a majority of joint ventures

fail. Many authors study factors that are assumed to explain joint venture failures, often

without any further reflection.

6.5.1.

Conflicts between the partners

Joint venture satisfaction is closely related to management issues like knowledge transfer.

In the developed world learning-related joint ventures are considered to be especially

hard to manage. The reason for this is that the alliance must accomplish several

objectives simultaneously; knowledge acquisition must not only take place, in most cases

it has also to be brought back to the mother companies in order for the joint venture to be

perceived as successful (Makhija et al., 1997). To transfer knowledge (especially tacit

knowledge) is difficult since the mother company might be unwilling, or unconscious of

the need, to change its behaviour and hence lose the learning opportunity (Inkpen et al.,1998).

Since knowledge is a part of a company’s competitive advantage, partners usually try to

withhold knowledge from their counterparts. One important reason for this is because

learning changes the bargain power division between the partners. Imbalance in bargain


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power can lead to that the partner with high bargain power (as a result of bringing

knowledge as a valuable resources to the company) regards the costs higher than the

returns; at the same time as the partner with the lower bargain power benefits greatly

(Makhija et al., 1997).

Conflicts concerning knowledge acquisition and technology transfer are even more

visible in joint ventures in the developing world. In China this issue has been especially

infected since the country has an insufficient legal system protecting intellectual property

rights (IPR) (Käfling, 2004). As a result the Chinese aim for western technology becomes

problematic since the western partner must protect that same knowledge (Weldon et al.,

1999).

Other issues causing conflicts in Sino-foreign joint ventures in China are the number of

working hours, commitment to the company, and trust within the joint venture.

Differences in time perspective and business experience are others (Walsh & Wang,

1999). The most important reason for conflicts is, however, different goals and objectives

with the joint venture company. When the Chinese partner desires to get access to high

technological knowledge through the joint venture, the western partner often only wants a

pass to the emerging Chinese market and return on investments.

6.5.2.

Conflicts within the joint venture company

Conflicts within developing country joint ventures are often regarded as rooted in

different cultural perspectives. Many authors have, for example, claimed that the reason

for why western companies have problems in China is because of their disregard of

cultural differences (Antoniou & Whitman, 1998; Fang, 1999; Morris, 1998; Sergeant &

Frenkel, 1998; Zheng, 1997).

Cultural differences become especially visible when dealing with matters concerning

management of the workforce. Sino-western joint ventures have historically had a high

employee turn over rate, despite the fact that Chinese employees generally are more loyal


35/43


to their companies than western employees (Wong, Hui, Wong, & Law, 2001). Disputes

between the Chinese and the Western partner often arise about the management of the

workforce (Weldon et al., 1999). Other problems partly explained by different cultural

backgrounds are the foreign companies’ difficulties in recruiting sufficient local

managers and labor. Chinese managers are by many western executives regarded as

unwilling both to take responsibility and delegate work tasks (Vanhonacker & Pan,

1997).

6.5.3.

External Influence

The legal difficulties related to investments in China have been emphasized by many

authors. The role of the political influence in Chinese business ventures is also a source

of conflict. Especially western partners engaging in Sino-Western joint ventures voice

frustration because of the inertia and slowness when dealing with government

bureaucracy (Weldon et al., 1999). Despite the fact that the regime claims to be

simplifying procedures for foreign direct investments, there are still a vast number of

legal pitfalls for foreign owned joint ventures in China (Frankenstein, 1993; Si et al.,

1999).

One complicating factor for the Sino-foreign joint ventures is that they are bound by

different laws depending on if the Chinese partner is state owned or a private company

(Si et al., 1999). To do business within the Chinese legal system is by many companies

considered as to work by “trial and error” (Lee, 1999).

However, the difficulties caused by the external environment that foreign companies face

when they engage in joint ventures in China are no different from those they would haveexperienced if they had invested in China through a wholly owned subsidiary.


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7.

Joint Ventures – A Story of Success or Failure?

The opinion that the majority of joint ventures fail is common in the literature 9. This

statement is however problematic, in several ways. Firstly, since no consensus has yet

been reached about how performance should be measured in joint ventures (Child, 2003)

it is difficult to evaluate if joint ventures are successes or a failures. Secondly, few

comparative performance studies exist. The majority of articles that investigate

performance are not focusing on studying the performance construct per se but how

performance is related to other factors (e. g. control, partner selection and bargain

power). The studies that are usually referred to when establishing the “fact” of the high

level of joint venture dissolution are often old and not always methodologically wellfounded10.

Another complicating factor is the large differences in legal and political framework the

joint ventures face in different countries. These differences are reflected in perceived

performance; joint ventures formed by developed country partners in developing

countries are usually described as more unstable compared to joint ventures in developed

countries (Beamish, 1985). The Chinese situation is widely acknowledged to be

especially challenging (Beamish, 1993; Child & Markóczy, 1993). Despite these

potential straining factors, studies show that “ EJVs in China have a higher level of

profitability than cooperative operations or wholly foreign-owned subsidiaries.” (Pan

1999: p369) This result, together with the findings that joint ventures are less likely to be

dissolved than wholly owned subsidiaries (Gomes-Casseres, 1987), gives a different

picture from joint ventures as unprofitable and highly risky projects. To summarize, the

discussion about the level of joint venture failure is both more complex and rich in

nuance than many authors claim.

9 For a summary of studies ranging from about 30% to 70% dissolution rates for

international joint ventures see Hennart (2002)10 Several of the most cited sources (with the highest dissolution rates) are reports

from consultancy agencies; something that is problematic since these companies do

not share the methodological standards of the academia, and since they have an self-

interest when it comes to depict joint ventures as hard to manage


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