Do Partners' Differences Affect International Joint Venture Control and Performance?

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ABSTRACT

The paper examines the influence of differences between partners on the control of international joint ventures (IJVs) and its subsequent performance performance. The term "partners' differences" here refers to their perceptions of differences in cultures, objectives when entering IJVs, and partners' business relatedness to their IJVs. IJV control is conceptualized across three dimensions including mechanism, focus, and extent. The empirical evidence is based on a survey of Finnish which established firms having established IJVs with local firms in the 1990s. The results showed that the higher the level of the partners' perceived differences with their local counterparts were, the more likely they were to exercise formal, broad, and tight control over their IJVs. The results also indicate that in the case of major differences between partners, formal, broad and tight control by foreign partners lead to better IJV performance. In the case of lower level differences between partners, social, narrow, and loose control by foreign partners lead to better IJV performance.

INTRODUCTION

International joint ventures (IJVs) are formed between firms with different organizational and cultural characteristics (Duan, 2007). Problems occur in IJVs due to the difficulties in managing them caused by the presence of two or more partners (Inkpen & Beamish, 1997). In particular, conflicts between partners are caused by the differences between partners such as the incompatible management styles and approaches, and cultures (Killing, 1 983). Differences between partners often increase the risk of misunderstanding and cooperation failures (Child & Yan, 2003). Thus, IJVs are notoriously difficult to control (Yan & Child, 2004). While previous research has not provided evidence directly explaining how parent firms make control structure choices (Groot & Merchan, 2000), it has suggested some possible determinant factors (Geringer & Hebert, 1989; Blodgett, 1991a; Werner, 2002) such as culture (Hennart & Larimo, 1998), and their motives (Calantone & Zhao, 2001). Chang and Taylor (1999), who studied the control exercised by 107 American and Japanese Multinationals (MNCs) over their subsidiaries in Korea, found that national culture was one of the key influence on the choice of control mechanisms. Child et al. (2005: 224) maintain that foreign parent firms ' cultures may well be expressed in the modes of their control in IJVs However, previous research on the effect of cultural preference on management control is decidedly mixed (Chalos & O'Connor, 1 998). Several researchers found no significant relationship between national culture and management controls (Chow, Shields, & Chan, 1991; Frucot & Shearon, 1991; Chow, Kato, & Shields, 1994; Merchant, Chow, & Wu, 1995). In contrast, other researchers proposed that there were significant interactions between national cultural dimensions and management controls (Harrison, 1 993 ; Harrison, McKinnon, Panchapakesan & Leung, 1 994; Lau, Low, & Eggleton, 1 995 ; O'Connor, 1995). This is something of a puzzle and it has been suggested that, further research is needed to investigate the effects of cultural differences on IJVs (Pothukuchi et al., 2002).

Furthermore, partners are from different countries and therefore, often have different goals when they enter into IJVs. Luo and Park (2004) suggested that the incongruent goals of partners lead to reduced IJV performance. The existing research does not show how firms can handle the differences in partner's goals in joint venturing to stimulate an increase in IJV performance. Another potential factor that might influence IJV control and performance is the extent of business relatedness between partners and to the IJVs, which has received considerable attention in IJV research. Some studies have focused on relatedness between parent firms (Saxton, 1997), while others have focused on relatedness between partners and the units (Hanvanich et al. …