Academic journal article Journal of International Business Research

Keeping Optons Alive by Repairing Damaged Relationships in International Joint Ventures

Academic journal article Journal of International Business Research

Keeping Optons Alive by Repairing Damaged Relationships in International Joint Ventures

Article excerpt

INTRODUCTION

Firms use international joint ventures (IJVs) for the purpose of technology/resource exploitation or exploration, economies of scale or scope, market adaptation, or risk diversification (Cuypers & Martin, 2010; Hennart, 1988; Parkhe, 1991; Hill & Hellriegel, 1994; Hitt, Dacin, Levitas, Arregle & Borza, 2000; Inkpen & Beamish, 1997; Tong, Reuer & Peng, 2008). Alternatively, IJVs carry managerial costs caused by complexities and challenges associated with joint investments, coordination or control, multiple agencies, or competition and conflict (Barden, Steensma & Lyles, 2005; Das & Teng, 2000; Hambrick, Li, Xin & Tsui, 2001; Inkpen & Ross, 2001; Reuer & Leiblein, 2000; Tong & Reuer, 2007).

It is notable that IJVs are commonly characterized by their inherent instability that eventually leads to a high failure rate (Das & Teng, 2000; Dhanaraj & Beamish, 2004; Hennart et ah, 1998; Park & Ungson, 1997). Just as few human marriages are truly an ideal picture of two individuals living "happily ever after," conflicts and relationship damages are common in alliance relationships. Relevantly, Eaves, Weiss, and Visioni (2003) analyzed a three-year cross-industry study of alliance relationship management and found that poor or damaged relationships accounted for fifty-two percent of all broken joint ventures (JVs). For this reason, IJV instability or termination is popularly studied (e.g. Das & Teng, 2000; Hennart et ah, 1998; Yan & Zeng, 1999).

Just as few individuals would want to divorce their spouses when relationship difficulties initially arise, few managers terminate their alliances right away when relationship damages occur-if they do, they would be regarded as reckless. However, over the long run, we do know that a large percentage of individuals and firms terminate their relationships. Therefore, it is certain that many firms remain in a difficult collaboration for some time, and that some eventually terminate their relationships and presumably others repair their damages and move on with relationships that are more functioning. Repairing damaged relationship in the context of strategic alliances can be defined as significant efforts to save and improve a troubled relationship that has a high likelihood of failure and termination in the absence of serious efforts to save it (Peng & Shenkar, 2002).

Therefore, why do firms choose to remain in a difficult collaboration? While motivations to repair damaged IJV relationships range from an interest in deriving economic value from the collaboration to a desire to protect corporate reputation as a good partner, one potential motivation that has not been discussed before is that partners may be interested in preserving the real option value of their IJV relationships. IJVs have long been conceptualized as real options (Cuypers and Martin 2010, Kogut 1991, Reuer and Leiblen 2000, Tong et al. 2008). Real option perspective sheds new light on how firms deal with IJV termination as well as why firms choose IJVs over other governance modes. Real options view argues that entering into uncertain markets via JVs is like buying call options (Chi and McGuire 1996, Cuypers and Martin 2010, Folta 1998, Kogut 1991, Tong et al. 2008). As a real option investment, IJVs carry the benefits of preserving upside potentials and curtailing downside risks under conditions of high uncertainty (Dixit and Pindyck 1994, Folta and Miller 2002, Kumar 2005, Pindyck 1991, Reuer and Leiblein 2000, Tong et al. 2008).

Consequently, we advance the argument that repairing damaged relationships represents partners' efforts to keep real options alive. This argument builds on a straightforward but somewhat counterintuitive line of reasoning: to the extent that IJVs represent any real option value, prematurely closing or ending any IJV relationships due to relationship conflicts will immediately obliterate any value present or future of these real options. …

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