Inter-Partner Credible Threat and the Survival of U.S.-China Joint Ventures

By Duan, Jason; Juma, Norma | Journal of Business Strategies, Spring 2007 | Go to article overview

Inter-Partner Credible Threat and the Survival of U.S.-China Joint Ventures


Duan, Jason, Juma, Norma, Journal of Business Strategies


Abstract

International joint ventures (IJVs) are perceived as essential strategic weapons by which firms can transfer the complex complementary competencies needed for competitive advantage within firms' core markets and technologies. This study attempts to explore the relationship of inter-partner credible threat and the survival of IJVs in China. The study found that the existence of inter-partner credible threat, and high product relatedness between foreign parent and IJV, favorably influence the IJV's long-term survival.

Introduction

The proliferation of international joint ventures (IJVs) in emerging economies, particularly in China, in the last decade, has stimulated great research interest. They are perceived as increasingly important strategic weapons by which firms can transfer the complex complementary competencies needed for competitive advantage within firms' core markets and technologies (Harrigan, 1986). Beamish (1994) described joint ventures, the most common form of strategic alliance, as the dominant strategy used by multinational firms in emerging markets. International joint ventures have been widely considered as hybrid forms of organizations which aim to bring together complementary skills, know-how and resources of two or more parent firms to accomplish specific objectives. The cross-cultural and inter-firm nature of IJVs are key sources of the additional complexities and challenges in the management of an IJV.

Although IJVs have become increasingly important in emerging markets, a high level of dissatisfaction with actual outcomes relative to expectations has been reported (Hitt, Levitas, Arregle & Borza, 2000; Madhok & Tallman, 1998). Of the particularly critical decisions, partner selection has been seen as especially important to a venture's success (Geringer, 1988; Saxton, 1997). In an international setting, differences in culture, infrastructure, economic development, and government policies increase the complexity and the vitality of the partner selection (Dacin, Hitt & Levitas, 1997). However, previous empirical studies on partner selection tend to focus on the organizational characteristics of partners, such as strategic symmetry (Harrigan, 1988), inter-firm diversity (Parkhe, 1991), match of partner characteristics (Geringer, 1988), and inter-partner compatibility (Beamish, 1988; Hill & Hellriegel, 1994; Inkpen, 1995; Inkpen & Currall, 1998). In essence, the emphasis is on the cooperative aspects of venture partners. The use of economic constraints and mechanisms such as the inter-partner credible threat in curbing opportunistic behavior of partners, and its impact on the venture's performance, have not fully been explored. Following the tradition of game theory application in the study of joint ventures (Heide & Miner, 1992; Parkhe, 1991), Zhang and Rajagopalan (2002) argued that inter-partner credible threat plays a more important role than partners' management control in determining partners' payoff in IJVs. He defines inter-partner credible threat as the certainty of either partner's retaliation given that the other partner cheated earlier (Zhang & Rajagopalan, 2002). The existence of inter-partner credible threat will not only reduce IJVs coordination costs, but also enhance partners' cooperative behaviors and result in better performance. Coordination costs are the expenses in monetary terms, as well as managerial time and effort that the partners incur in the process of composing tasks and coordinating activities across organizational boundaries (Zhang & Rajagopalan, 2002).

This study attempts to test the theoretical predications on the use of inter-partner threat and its impact on IJV performance. Alter the introduction, we briefly review the literature of joint venture partner selection and joint venture performance. Then we develop our hypotheses. Next we describe our sample and research method, followed by a discussion of the statistical analysis. …

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