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

By Le, Nguyen H. | Journal of International Business Research, July 1, 2009 | Go to article overview

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


Le, Nguyen H., Journal of International Business Research


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., 2005). However, the results of business relatedness on IJV performance are thus far undetermined (Hanvanich et al., 2005). Moreover, previous studies have ignored the role of the relatedness on the IJV control. As such, there is a need to further investigate the factors that might influence IJV control and performance in the context of cultural differences, differences in motive, and business relatedness. This paper, therefore, attempts to fill this gap.

This paper aims to further analyze the influence of foreign partners' differences on thencontrol of IJV and on the IJVs' performance. The general research question is "How do partners9 differences influence IJV control and performance?" Expressed in more detail, the paper's aim is to answer the questions:

1. How do partners ' perceptions of differences in management style, joint venturing objectives, and business relatedness affect the control they exercise in IJVs?

2. What are the relationships between partners ' differences, IJV control, and IJV performance ?

This paper departs from existing work in two ways. First, while most previous researchers have focused on only one or two dimensions of control in their IJV research, in this paper, the IJV control adopted is broader than usual in taking into consideration three dimensions of IJV control: mechanisms, focus, and extent. Second, much previous research has focused on differences in IJVs and how these differences affect IJV performance. Taking one step further, this paper points out how a parent company can cope with the differences through its control strategies, leading to better IJV performance. In this paper, an IJV is regarded as a separate firm formed by two or more partners with an expected proportional share of dividend as compensation (Contractor & Lorange, 1988). Partner 's differences refer to the differences in businesses (e.g. Merchant & Schendel, 2000), objectives of entering to the joint ventures (e.g. Harrigan, 1 985), and the partner's management style (e.g. Kogut & Singh, 1988). IJV control refers to the influence of foreign partners on IJV operation (Geringer &Herbert, 1983). IJV performance is the achievement of goals set by parent firms and is evaluated from a different perspective (Duan & Chuanmin, 2007). Moreover, Beamish and Delios (1 997) concluded from their review that perceptual and objective measures of IJV performance are generally correlated. In the present study, perceptual measures such as parent satisfaction with the IJV, total performance and financial performance are used to in investigate the performance of IJVs. The paper is organized as follows; first it conceptualizes the IJV control along three dimensions including control mechanism, focus, and extent. Then, it develops several hypotheses regarding the influence of partners' differences on IJV control structure and IJV performance. Next, the paper discusses the methodology used, the results, and the implications of the study.

CONCEPTUALIZATION OF IJV CONTROL

Management control refers to the process by which an organization influences its members and its units to work in ways that meet the organizational objectives (Glaister, 1995). In IJV, because there are two or more parties involved, management control is complex (Geringer & Hebert, 1989). Furthermore, researchers have acknowledged that the control systems are multidimensional (Berrell, 2007; Kumar & Seth, 1 998 ; Lu & Hebert, 2005). Unfortunately, the existing research tends to focus on only one or two dimensions. In order to be able to capture the complex nature of the IJV and conduct IJV control research thoroughly, this study adopts the multidimensional approach of control developed by Geringer and Hebert (1989).

Control mechanisms

Control mechanisms are structural arrangements deployed to determine and influence what the members of the organization do (Geringer &Hebert, 1989; Fryxell, Dooley, & Vryza, 2002). Control mechanisms consist of a variety of instruments including formal and social controls that are available to firms for the exercise of effective control over their members (Friedman & Béguin, 1971). Formal control depends on hierarchies, standards, codified rules, procedures, goals, and regulations that specify desirable patterns of behavior (Das & Teng, 1998). These instruments of formal control are usually agreed upon and imposed by both foreign and local parent firms (Fryxell et al., 2002) and typically include control over the constitution of the board of directors, the appointment of key personnel, the planning and approval process for capital budgeting and resource allocation, and the lay down procedures and routines for IJV (Lu & Hebert, 2005; Mjoen, 1993). Social control is designed to promote expectations and mutual commitments through which IJV managers learn to share the common attitudes and knowledge of the organization (Nonaka & Takeuchi, 1995). Social control refers to various mechanisms such as informal communication, information exchange and training, mentoring, and personal relationships. Social control develops a common organizational culture that fosters shared values and norms, without explicitly restricting the behavior of the targeted people through the means of those social controls (Chalos & O'Connor, 1998; Fryxell et al., 2002; Schaan, 1983).

Control focus

Control focus can be divided into broad control and narrow control (Geringer & Herbert, 1989). In control focus, the partners can choose to have a broad control focus and attempt to exercise control over the entire range of the IJV' s activities, or they can have a narrow control focus and confine their control activities to the performance dimensions they consider to be critical (Geringer & Hebert, 1989; Groot & Merchant, 2000). Child et al. (2005) maintain that depending on several factors, such as the parent firm's competencies and the critical nature of such activities parent firms may focus their control on activities related to technology in one case but on market related activities in another. There are also cases when the parent firms may focus their control on both technology and market related activities (Child et al., 2005). The areas of control focus are marketing, sales and distribution, procurement, general management and operation, finance and accounting, research and development, production and quality, and human resources.

Control extent

The control extent refers to the degree or tightness of control which is exercised on the venture (Geringer & Hebert, 1989). Control extent consists of tight control and loose control. In loose control, the parent firms tend to use only one or two control mechanisms and focus thencontrol exercised on only one or two control areas in the IJVs. Furthermore, the parent firms are more flexible in their evaluation of employees' behavior and their performance. The frequency of report submission by the IJV managers to the parent firms is low and there are very few meetings between the parent firms and the IJV managers. In contrast, the tight control mode tends to be strict with respect to the employee's dress code, punctuality, and cost-consciousness; and also detail oriented, and precise in operation. Tight control can be effected through any mechanism that provides the partner with a high degree of certainty that the personnel in the IJV will act as the given partner wishes. Tight control is manifest also if the IJV staff is held strictly accountable for adhering to a complete set of prescribed actions such as policies and procedure. Tight control is also related to very frequent and precise reporting (Child et al., 2005).

In summary, IJV control consists of three dimensions mechanisms (Formal; Social), focus (Broad, Narrow), and extent (Tight, Loose). These three control dimensions produce eight possible control structures, namely Formal, Broad, Tight (FBT), Formal, Broad, Loose (FBL), Formal Narrow, Tight (FNT), Formal, Narrow, Loose (FNL), Social, Broad, Tight (SBT), Social, Narrow, Tight (SNT), Social Broad, Loose (SBL), Social, Narrow, Loose (SNL).

PARTNERS' DIFFERENCES AND IJV CONTROL AND PERFORMANCE

Partners coming to joint venturing differ in their businesses, the objectives they have in mind when forming the IJV, and in their management styles. IJVs usually experience management difficulties when partners who come from different backgrounds work together (Wang et al., 1 999). Thus, establishing control over the IJVs becomes crucial for IJV operations and therefore, has a direct effect on IJV performance.

Management style

Foreign and local parent firms differ in their management styles, which may result in conflict and incompatible goals (Ding 1997, Hennart, Kim, and Zeng, 1998; Yan & Gray, 2001). This is because the more diverse the organizational cultures of the partners are, the greater the differences in their organizational and administrative practices, employee expectations, and interpretation of and response to strategic issues (Kogut & Singh, 1988). This may lead to bargaining and negotiating between foreign and local parent firms, which slows down the decision-making process and adds to bureaucratic costs (Balakrishnan & Koza, 1993; Ding, 1997). In the case of organizational cultural differences, foreign and local partners are also different in routines (Hennart et al. 1998) and in dealing with conflicts over issues of product quality, exports, employee wages, or labor policy. These may result in higher uncertainty, the possibility of opportunism, and higher bureaucratic costs as a result of greater bargaining ad negotiating between partners (Ding 1997, Pangarkar & Klein, 2004). To eliminate the problems arising from long negotiation processes and delays in decisionmaking, foreign partners may need to exercise broad and tight control over the IJVs. In addition, to avoid misunderstanding in the IJVs, partners are required to establish clear hierarchical control by creating formal control over the IJVs. According to Egelhoff (1984), the greater the organizational cultural distance between foreign and local parent firms, the greater the need to exercise formal control over the IJVs. As a result, it can be expected that:

Hypothesis 1: The greater the management orientation differences between foreign and local partners, the more likely foreign partners are to exercise broad, formal, and tight control over the IJVs.

Objectives of entering into IJVs

Partners from different firms might have different objective when entering IJVs. According to Harrigan, (1985), partner firms form IJVs to generate internal benefits, competitive benefits, and strategic benefits.

From the local government perspective, IJVs are often a means to protect local firms and to foster the development of the local economy and industry (Makino, 1995). Previous researchers suggest that the objectives of parent firms determine their adoption of control mechanisms in IJVs (e.g. Calantone & Zhao, 2001). Gaining management control over an IJV is one way to ensure that one's strategic objectives are actively pursued, and to actively monitor and curb possible opportunism by one's partner (Williamson, 1 975). When the differences between partners are great, these often result in conflictual behavior between partners, leading to misunderstandings and interaction problems (Pothukuchi et al., 2002). Killing (1983) proposed that IJVs work most effectively when they avoid the coordination costs of shared management. Coordination costs often occur when there is a constant need for communication, shared decision-making and ongoing negotiations (Gulati & Singh, 1998, Barden et al., 2005). These are often time consuming and reduce LJV performance. Thus, when foreign and local partners' objectives are different, foreign partners need to impose broad and tight control over their IJVs. In addition, as partners' expectations are different, precise guides to the procedures and operations of the IJVs are needed, leading to the exercise of formal control by the foreign partners. As a result, it can be expected that

Hypothesis 2: The greater the differences in objectives between foreign and local partners, the more likely foreign partners are to exercise broad, formal, and tight control over the IJVs.

The partners' business relatedness

The partners' business relatedness is a measure of how similar or connected are the business activities in nature of the partners relative to those performed by the IJVs (Merchant & Schendel, 2000). Firms are involved in the same industry when they joint venturing, and the ventures have the potential to learn from both partners. IJV control is therefore designed to support IJVs in their learning from their parents. Thus, when partners are involved in a similar business, less control is needed so as to leave room for learning to take place in the IJV. This is because similarities in the business activities of the parent and the IJVs lead to increased economies of scale and scope by increasing learning opportunities and reducing production cost. Therefore, partners should let the IJVs to take full advantages of the similarities, and learning opportunities by exercising narrow and loose control over their IJVs. In addition, previous researchers have pointed out that social control can promote increased learning in the ventures (Inkpen & Beamish, 1997). On the other hand, the management of a joint venture becomes critical when the new business is unrelated to a firm's existing operations (Kogut, 1988). When working in the new and unfamiliar business, the partners are required to work closely with IJV management teams in order to follow the situations and to make sure that the new business will develop in the desired direction. Thus, formal, broad, and tight controls are needed. As a result, it can be expected that:

Hypothesis 3: The higher the degree of partners ' business relatedness to each other and to the IJVs, the more likely foreign partners are to exercise social, narrow, and loose control over the IJVs

Partners' differences and IJV control and performance

Child et al. (2005) maintain that control is critical for the successful management and performance of a strategic alliance. Lorange et al. (1986) maintain that through exercising a proper IJV control structure, foreign parent firms can make sure that their strategies are effectively implemented, and their resources are efficiently utilized for the enhancement of the IJV' s performance. To achieve the overall objectives in the IJVs, partners have to consider both the IJV control structure and the risks involved (Lynch, 1998), taking into account the extent of the differences between partners and the degree of trust between them (Birnberg, 1998). Differences between partners often results in ineffective communication and quite often lead to the dissolution of IJVs (Meschi & Ricio, 2008). Lorange et al. (1986) maintained that by exercising formal control in dealing with the internal uncertainty caused by differences, the foreign partners can make sure that their strategies are effectively implemented, and that their resources are efficiently utilized for the enhancement of the IJV performance. In contrast, adopting narrow and loose control to cope with internal uncertainty can lead to IJV failure (O'Connor, 1995). Mjoen (1993) found that a tight level of control was associated with better performance in cases where partners have differences in thenbusinesses and objectives. In addition, broad control has a crucial role to play in the success of IJVs (Barden et al., 2005; Berrell, 2007), especially, when transaction costs are high and partners know little about each other (Pangar & Klein, 2004). Thus, as a result of hypothesis 1 to hypothesis 3 we expect that:

Hypothesis 4a: Formal, broad, and tight control exercised by foreign partners over their IJVs leads to better IJV performance in cases of greater differences between partners

Hypothesis 4b: Social, narrow, and loose control exercised by foreign partners over their IJVs leads to better IJV performance in cases of lesser differences between partners

METHODOLOGY AND RESULTS

Method

This study adopted a survey research design to fit with the nature of the research. In the survey, the questions about joint venture control and performance were collected directly from those involved in IJV operations. Furthermore, to be able to generalize conclusions about the joint venture control, a large number of IJVs is needed for any examination. This would have made face to face interviews very costly in terms of time and money, and an impractical way to proceed to achieve the desired sample size. The measure of variables is based on a 5 point-scare (see Appendix for more details). Following Blodgett ( 1 99 1 b), Beamish & Inkpen ( 1 995), Glaister, ( 1 995), Nguyen & Larimo (2008), the methodology used to analyze the relationships between dependent and independent variables in IJV research incorporates description statistics and the Chi-square test. The purpose of the methods is to determine how well an observed set of data fits an expected set of hypotheses. These methods are used to examine the differences with categorical variables and the relationships between internal uncertainty factors and IJV control structures, and IJV control structure and IJV performance. The method is particularly useful to find out whether an IJV control structure which is made up of different elements of IJV control dimensions (formal, social, broad, narrow, tight, and loose) has a normal distribution or if the structure has formed under the influence of the parents' differences and business relatedness. Similarly, the method evidences whether or not IJV performance is influenced by the IJV control structure.

Sample description

The target firms and investments were identified as follows 1) from the FDI data base collected by the project leader from the late 1980s based on press releases on IJVs published in leading business magazines and newspapers and 2) from annual reports and websites of the 250 largest Finnish firms; 3) based on the earlier surveys focusing on IJVs and WOS by Finnish firms conducted by the project leader. From the resources, we identified 340 qualifying IJVs formed by Finnish firms since 1988 and in operation at least up until 2002. The qualifying 340 IJVs involved 200 Finnish parent firms. From among those 200 firms, several firms were very difficult to contact either because they had been restructured or gone out of business. The firms were contacted to determine the correct informants. In some firms there was no longer anyone with sufficient knowledge required for the study. This left a total of 161 Finnish parent firms. Given time and cost constraints a postal questionnaire and online web survey were used to gather the data. The participants were those managers who had been directly involved in establishment and operations of IJVs.

To enhance the quality of the data, the respondents were contacted by phone in December 2006 to explain the key points of the study and the questionnaires. In exchange for their participation in the study and to provide motivation and stimulate accurate responses, the respondents were assured of anonymity, promised a summary report of the findings and entered into a draw for three gifts. After one reminder at the end of the January 2007, at another the end of February, 54 questionnaires were returned, of which 5 questionnaires were not usable. Thus, the final sample was 49 IJVs including 40 Finnish parent firms. The response rate was 24.84% which is relatively similar to that of earlier respective studies in Finland (see Larimo & Rumpunen, 2006).The sample was carefully examined for any systematic response bias using t-tests. Respondent and non respondent firms were compared by their age, size, international experience, and IJV experience. No statistically significant difference was found. Thus, there was not response bias to be found in the final sample. Among the 49 IJVs of the final sample, 45% were established in 1988-1995, 55% in 1996-2006; 53 % through partial acquisitions, 47% through greenfields, 76 % were with 2 partners and 24 % with 3 partners; 61% with indefinite duration, 22% with duration of less than 5 years, 17 % with a duration of more than 5 years; 41 % had between 10% and 49% Finnish ownership, 10% had equal ownership, 49 % of had Finnish major ownership at establishment; 71% were located in emerging economies, and 29% in developed economies; 63% dealt with industrial products, 27 % with consumer products, 10 % with both consumer and industrial products. The summary of the operationalization of the key variables of the study is presented in Appendix 1.

Results and analysis

Regarding partners' differences and IJV control, most respondents regarded countries like Estonia, Russia, China in a very similar way, i.e having the same level of differences and with those differences being high level, in terms of management orientation with Finland norms (the mean is 1.5, with l=very different and 5=very similar). With regard to the perception of the objectives of entering into the IJVs, most respondents when asked to consider whether objectives conflict, regard their partners who come from emerging economies as having conflicting objectives (with a mean of 4.1; where l=strongly disagree and 5= strongly agree). Partners operating in developed economies are seen as having less conflictual objective when entering IJVs - with a mean here of 2.2.

The most common control structure adopted by Finnish partners in the reviewed IJVs was formal, broad, and tight control as utilized by 26 of the 49 which accounts for 53.06%». With regard to Hypothesis 1, over 70% of Finnish partners exercised formal, broad, and tight control when they perceived high organizational cultural differences with local partners. Less than 15 % of Finnish partners exercised social, narrow, and loose control, and the rest, about 1 5 % of the Finnish partners exercised other control structures such as social, broad, and tight; formal, narrow, and loose control, over their IJVs. Based on the chi-square test, where x^sup 2^=13.01, the result is significant at p<0.05 (df=5). Thus, the result supports Hl. Turning to hypothesis 2 over 75 % of Finnish partners used formal, broad, and tight control when they perceived major objective differences with the local partners. Based on the chi-square test, where x^sup 2^ = 15.27, the result is significant at p<0.01 (df=5) (see table 2). Thus, the results support H2. Regarding Hypothesis 3, over 90% of Finnish partners exercised formal, broad, and tight control when they perceived high business relatedness with thenlocal partners and with the IJVs. About 5 % of Finnish partners exercised formal, narrow, and loose control, and the remaining roughly 5 % Finnish partners exercised social, broad, and tight control over their IJVs. Based on the chi-square test, x^sup 2^=l 7.0 1 the result significant at p<0.005 (df=5). Thus, the result supported H3

Turning to partners' differences and the control and performance of IJVs, the performance was measured using seven different subjective measures. Respondents were asked to rank on a 5 point Likert scale, first the weight given and secondly their degree of satisfaction with all seven measures. The two most important measures of performance were total performance and financial performance. In the reviews, the mean of the assessment of financial performance of the IJVs was 2.9 and the mean relating to overall performance was 3.6. (l=very dissatisfied to 5=very satisfied). This shows that Finnish parent firms are somewhat more satisfied with their IJV' overall performance than they are with the financial performance. In addition, the findings of the study show that when they perceived high differences with their local partners, Finnish partners are more satisfied with their IJV performance (mean 4.09) when they exercise formal, broad, and tight control over their IJVs than other control structures (mean 2.25).

Based on the chi-square test, where x2= 15.32 the result is significant atp<0.01 (df=5) (see table 2). Similarly, when Finnish partners perceived only minor differences with their local partner, they also seem to be more satisfied with IJV performance (with a mean for performance of 3.56) when exercising narrow, social, and loose control over their IJVs, than in the cases of using other control structures in IJVs (with a mean for performance of 2.47). Based on the chi-square test, where x^sup 2^ = 12.91 the result is significant at p<0.05 (df=5) (see table 2). Thus, the results support H4

CONCLUSIONS

The study investigated whether or not partners' differences influence IJV control and performance. Partners' differences are categorized into differences in business relatedness, objective held when entering IJVs, and management orientations. IJV control dimensions are based on the work of Geringer and Hebert (1989) including control mechanism, control focus, and control extent. The empirical evidence is based on a survey of Finnish firms that established IJVs with local firms in the 1990s.

The results show that partners' differences have strongly influenced IJV control and thus, having influences on IJV performance. The results reveal that partners perceiving high level of difference from each other require formal, broad, and tight control exercised over their IJVs. The results, in addition, indicate that in the case of high level of differences between partners, formal, broad and tight control by foreign partners lead to better IJV performance. In contrast, in the case of low level differences between partners, social, narrow, and loose control by foreign partners leads to better IJV performance.

This study has provided empirically tested hypotheses acting as an important continuation to current joint venture theory on control perspectives. It provides new insights into the way partners cope with internal uncertainty caused by partner's differences, and the resulting effect on joint venture performance. The findings extend the existing research and contribute to the understanding of the phenomenon of international joint venture control

The study does have some limitations due to its small sample size and due to the focus of the foreign partners being from only one country - Finland. In addition, because IJVs change over time and the partners' degrees of difference may also reduce over time, it would be interesting to know the control and performance of IJVs will change against the respective measures. Researchers could use the framework of the present study with a bigger sample size and foreign parent firms from several countries. Finally, it would be worth researching if control of IJVs functioning in the emerging markets differs from that of those located in developed markets.

[Reference]

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[Author Affiliation]

Nguyen H. Le, University of Vaasa

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