Academic journal article International Management Review

Does Ownership and Culture Matter to Joint Venture Success?

Academic journal article International Management Review

Does Ownership and Culture Matter to Joint Venture Success?

Article excerpt

[Abstract]

Previous study shows that equity structure and cultural difference are important factors that influence the performance of joint ventures (JVs). Based on the JVs contract database and Import/Export ranking database we collected, our analysis shows that the performance of monopoly controlled JVs is better that others under the domestic market situation. However, cultural difference is not the hindering factor to performance; in fact, heterogeneity has provided JVs better outcomes. Based on grouped data samples, it is believed that a higher ratio of Chinese equity in JVs will create better export performance. However, the relation between foreign equity and import orientation is not significant.

[Keywords] Joint ventures; equity structure; cultural distance

Introduction

A joint venture is an enterprise established in accordance with the Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures. It's an enterprise jointly established by one or more foreign/regional companies, enterprises or other economic organizations, or individuals and one or more Chinese companies (enterprises or other economic organizations within the territory of China defined by the principle of equality and mutual benefit and approved by the Chinese government). Between 1979 and 2002, the Chinese government approved a total of 405,180 joint ventures with a total capital of 419.8 billion USD, accounting for 51% of the FDI in the same period (Bai, Tao, and Wu, 2004). According to Janger's study (1980), most of the Fortune 500 companies and the foreign enterprises with over one hundred million USD annual sales have already participated in setting up one or more joint ventures in China.

There is high risk for the management of joint ventures. Thirty-seven percent to 70% of the joint ventures had the problems with inefficiency and bad returns, and about 50% of the joint ventures suffered high-cost failures (Kogut, 1988; Bleeke and Ernst, 1993). Share ownership and non-ownership control was one important factor for the management achievement of a joint venture (Tsang, 1994; Park and Orgson, 1997). A survey of the joint ventures in Tianjin (Li and Wu, 2002) showed that the parent companies of joint ventures, especially the foreign parent companies, constantly struggled for control of the joint ventures through share ownership, non-owner ship, and personnel appointments. The following is the pattern of share ownership: after foreign partners successfully enter the Chinese market and when the Chinese partners lack funds and are unable to increase capital, the Chinese partners usually ask foreign partners to increase the capital and the shares they hold until the foreign partners control the joint ventures. The pattern of non-ownership is as follows: foreign parent companies contribute their funds, key technologies, critical management skills, and marketing networks as their input in the joint ventures, which make the joint ventures' decision making and daily operation heavily reliant upon the foreign parent companies; thus, the foreign parent companies eventually control the joint ventures. There have been some studies on the relations between the share ownership structures and business achievements of joint ventures.

The most typical is Killing's view that monopoly-controlled joint ventures have much better achievements. There are also some different conclusions that are mainly about the market environments in the developed countries.

In recent years, cultural differences have been used to explain the business achievements of the joint ventures (Child, 1994; Neelankavil, Mathur and Zhang, 2000), but the conclusions of the studies were not identical. For instance, some studies showed that cultural pluralism in a group might help improve creativity, and great heterogeneity might help the group make greater achievements (Eisenhardt, Schoonhoven, 1990; Bantel, Jackson, 1989; Hambrick, Cho, Chen, 1996), while other studies indicated that cultural differences might bring about more conflicts and might be negative to a group's achievements (Williams, O'Reilly, 1996; Ancona, Caldwell, 1992; Tuckman, 1965). …

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