Factors Affecting the Effectiveness of Equity International Joint Ventures (EIJVs) in Hungary

Article excerpt

Abstract

* This paper presents some characteristics of 34 equity international joint ventures (EIJVs) located in Hungary and their parent companies which contribute to EIJV effectiveness. Application of HRM practices of the host culture, dissimilarities of parent industries, differences in Hofstede's masculinity index, EIJV operation according to clearly stated objectives, parent satisfaction with equity distribution as well as EIJV age contribute to effectiveness, whereas resource dependence is negatively correlated with effectiveness.

* The paper also presents a model suggesting how effectiveness can be enhanced.

Key Results

* Based on the research findings, suggested characteristics for the foreign parents, the host parents and the EIJVS in Hungary are presented.

Even prior to the disintegration of the Soviet Union in 1989, the Hungarian government was one of the most economically market-oriented of all the countries in the Soviet Union. As Kaikati (1992, pp. 213-214) notes, Hungary "had adopted `Goulash communism' which permitted small-scale experiments in privatization in exchange for staying in the Warsaw Pact and following the Moscow line on foreign policy". Accordingly, "as a leader in restructuring, Hungary's experiences should be a precursor to what can be expected to occur in other centrally planned economies" (Lane 1995, p. 3).

Economic reforms were implemented as early as 1968, when decentralized planning and control were introduced into state-owned Hungarian firms along with a profit incentive for workers (Csath/Naylor 1986, Tarafas 1991). The first EIJV in Hungary was formed in 1973 with a work force that was free from state control (Bangert/Poor 1995). The exact number of EIJVS currently operating in Hungary is not known due to the fact that wholly foreign-owned affiliates and organizations with some foreign ownership are also classified as joint ventures according to Hungarian reporting procedures (Toldy-Osz 1995). The IJVs are registered as Hungary companies and the JV agreement need not be reviewed by the Court of Registration (Rubin 1995). Both Bangert and Poor (1995) and Hamill and Hunt (1993) reported that in 1992, there were over 13,000 joint, partially- or wholly-owned foreign ventures in Hungary. The Executive President of the Hungarian Joint Venture Association reports that there are currently (Toldy-Osz, July 1995) approximately 24,000 companies with foreign participation in Hungary, of which 19,000 are estimated to be joint ventures. However, the breakdown within these 19,000 companies between partially foreign-owned organizations and contractual and equity IJVS is still unknown.

There are several reasons for the dramatic increase in the number of EIJVs in Hungary. Kanter (1991, p. 153) describes Hungary as a cultural island, being "organizationally different from companies in other countries and very focused on economic regeneration." Healey (1994) notes that investments into Eastern Europe offer great opportunities for both resource- and market-seeking companies. These opportunities include skilled, low-cost labor, cheap physical capital, a supportive political environment, a potentially large market, good medium- and long-term growth potential, and a gradual easing of profit repatriation problems. Hungary exemplifies these characteristics. The country provides a well-educated work force at an average wage rate of $400 per month (Nemes 1995), well below that of Western Europe. As noted by Hamil and Hunt (1993), "Hungary is now fully committed to a market orientated, outward looking, export-driven economy. The attraction of inward foreign direct investment plays a crucial role in achieving these objectives and Hungary has been one of the most successful East European countries in this respect."

Smith and Rebne (1992, p. 208) found that in Eastern Europe, while "the JV entry mode is perhaps more likely to arrive somewhat unilaterally and as a defensive measure against problems of foreignness . …