Academic journal article Management International Review

Ownership Strategy of Multinationals from ASEAN: The Case of Their Investment in Sino-Foreign Joint Ventures (1)

Academic journal article Management International Review

Ownership Strategy of Multinationals from ASEAN: The Case of Their Investment in Sino-Foreign Joint Ventures (1)

Article excerpt

Abstract

* This paper examines foreign ownership choice in joint ventures formed by multinationals from ASEAN in China. A central hypothesis is formulated: foreign ownership in an international joint venture is related to the tradeoff between risk and return of the venture, and foreign investors' proprietary assets transferred to the venture.

* The empirical results support the hypothesis that a higher degree of foreign ownership is positively associated with amount of foreign investment, planned joint venture duration, and joint venture location. The study did not found supporting evidence for the hypothesis that foreign ownership choice is related to foreign investors' intangible assets.

Key Results

* The risk-return factors such as dollar amount of foreign investment, joint venture duration, and location were identified as factors having an impact on foreign ownership.

Joint venture has become a popular form of strategic alliance used by multinationals. Research on joint ventures has grown significantly in recent years. One of the important issues is the ownership control of a joint venture. Although joint venture partners can control a venture's operation through other means, they often rely on equity ownership (Root 1988). Using the transaction cost framework, prior studies have mostly focused on joint venture ownership strategies of multinationals from developed countries. Strategies adopted by multinationals from developing countries are understudied.

In the past few decades, foreign investments from developing countries have grown both in absolute terms and as a share of total global investments (United Nations 1993). This is especially true for foreign investments in China, the largest foreign investment recipient among developing countries. According to statistics from the Chinese government, about 80% of foreign investment projects came from developing countries/regions in Asia. In terms of contractual amount, multinationals from Association of South-East Asian Nations (ASEAN) invested US$ 29 billion in China from 1979 to 1995, as compared to the US (US$ 28 billion), entire Europe, Australia, and Canada combined (US$26 billion), and Japan (US$ 21 billion) (Data File 1996). Given this increasingly important role played by multinationals from developing countries, additional research on the investment behavior of these multinationals is warranted.

This paper focuses on ownership strategies of joint ventures established in China by multinationals from five ASEAN countries: Indonesia, Malaysia, Philippines, Singapore, and Thailand. The objectives of this paper are to identify and test the potential factors that influence ownership decisions made by these multinationals and to shed new light on the applicability of existing theories to new multinationals from developing countries.

Literature Review

Much of theoretical developments on foreign ownership in a joint venture is based on transaction cost analysis (Williamson 1975, 1985, Buckley/Casson 1976, 1988, 1996, Teece 1983, 1986, Hennart 1988). Because of market failures, firms incur transaction costs when transferring their proprietary assets. To reduce these costs, firms internalize intermediate product markets within themselves. Thus, firms attempt to control foreign operations through extending their boundaries rather than through licensing. A joint venture is more efficient when intermediate product markets fail, and when acquiring these assets through wholly owned subsidiaries proves too expensive (Hennart 1988) or through mergers are economically infeasible (Buckley/Casson 1988, 1996).

Transaction cost theorists further explain that tacit knowledge is costly to transfer. Hierarchical coordination through equity ownership is more efficient (Hennart 1988, Rindfleisch/Heide 1997, Pan/Chi 1999). Beamish and Banks (1987) demonstrated that under certain arrangements, transaction cost related problems could be more efficiently dealt with in a joint venture. …

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