International Joint Venture Dynamics

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International Joint Venture Dynamics

The external environment effects

By:

Angesom Habte Girmay

s2531968

MSc Business Administration - Organizational & Management Control

Supervisor: Prof. Dr. J. van der Meer-Kooistra

Co-assessor: Prof. Dr. D. M. Swagerman

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Abstract

This study investigates the dynamic processes resulted from the external environment over the

life of international joint ventures (IJVs). Adopting an in-depth case study method in mining IJVs

established by a parent company from Canada and a parent company from Eritrea, the study

seeks to gain understanding of how the external environment can create IJV dynamics. By

reporting a comparative case study of two IJVs, it is the first study in the East African country,

Eritrea, to investigate IJVs established by a parent company from a developed country and a

parent company from a less developed country (LDC) and located in the LDC. This study

contributes several theoretical insights to IJV dynamics. The findings show that the external

environment of a host country can create IJV dynamics in various ways. The resulting dynamics

can weaken or strengthen the IJV relationship. On the one hand, if the responses used by the

parent companies to counteract the effects of the environmental conditions match the relational

characteristics of the IJV and the characteristics of the environment, it can strengthen the IJV

relationship. On the other hand, if the responses used by the parent companies do not suit the

characteristics of the IJV relationship and the characteristics of the external environment, this can

lead to complex IJV dynamics. More specifically, the study found that shifts in the parent

companies` bargaining power and management control that resulted from the changes in the

external environment can lead to conflict between the parent companies, and thereby termination

of the IJV relationship.

Keywords: International joint ventures; Joint venture dynamics; External environment;

Bargaining power; IJV management control

Word Count: 11,719 (including appendices 13,167)

Bedumerweg 83 a

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1. Introduction

Coinciding with the rapid growth of international joint ventures (IJVs), many studies have focused on IJV relationships (e.g., Chang et al., 2015; Child & Yan, 2003). An IJV can be defined as an equity-sharing arrangement between two companies (one local, one foreign) that pool their resources and share risks and operational control to operate an independent business unit on a continuous basis to attain strategic objectives (Geringer & Hebert, 1989). The term “IJV relationship” includes the IJV and its activities, the relationship between the parent companies, and the relationship between the parent companies and the IJV (Van der Meer-Kooistra & Kamminga, 2015).

Several authors (for example, Yan & Zeng, 1999; Yan & Gray, 1994) have described IJV relationships as dynamic organizational forms. Although a rich body of literature has explored the concept of IJVs (e.g., Beamish & Lupton, 2009; Child & Yan, 2003; Inkpen & Beamish, 1997), little research has been done on the dynamic processes during the life of an IJV relationship; particularly, on how the external environment of a host country can cause IJV dynamics. Yan and Zeng (1999) have reported that one main reason for these dynamic processes is the developments in the environment of the JV. If this line of thinking is correct, then parent companies in an IJV should adapt their IJV management control to the environmental conditions that vary across national environments. If the IJV management control does not match the characteristics of the IJV relationship and the external environment, such a mismatch may weaken the IJV relationship. These prescriptions suggest that the issue as how the external environment of an IJV can cause IJV dynamics is an empirical question. Moreover, despite the significant increase in the number of IJVs established by a parent company from a developed country and a parent company from LDC, the extant literature is based largely on IJVs owned by firms from developed countries. As Beamish (1985) argue, the former and latter countries represent different environmental characteristics. Consequently, the literature fails to provide consistent evidence about IJVs owned by firms from developed countries and LDCs.

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By conducting in-depth, comparative case studies, this study contributes to the literature in several ways. First, by tracing the changes over the lifetime of two IJVs, it investigates dynamic processes over the lifetime of these IJVs. Second, while extant research has focused on IJVs from developed country partners, this study reports a comparative case study of IJVs between parent companies from a developed country (Canada) and a LDC (Eritrea) and located in the LDC, and thereby, enriching the literature with the Eritrean experience. Third, the study considers one important contingent variable: the external environment, which varies across nations (Chenhall, 2003). As Chenhall (2003) suggests, the external environment is dynamic in nature. Hence, it requires a continuous research.

Eritrea is one of the most geographically and politically strategic countries in the world. As such, nowadays many large multinational companies from various developed countries are hugely investing in the country. Thus, understanding the external environment of the host country is critical to the success of those firms in IJV relationships and for those firms contemplating IJV relationships in the future. Nevertheless, to date, no research on IJVs that operate in the country has been reported. This study, therefore, is the first of its kind and timely relevant. The study is guided by the following research question:

How can the external environment of an international joint venture, which is established by a parent company from a developed country and a parent company from a less developed country and located in the less developed country, cause JV dynamics?

The findings of this study show that the external environment can cause IJV dynamics in various ways. The study found dramatic differences between the dynamic processes occurred in two IJVs located in the same country. In the first case, the study found confirmative evidence that dynamic processes could cement the IJV relationship. Although the IJV faced various changes in its lifetime, the IJV was found to be profitable for both parent companies. In the second IJV, the interventions by the local government weakened the IJV relationship. As a result the IJV terminated. This indicates that dynamic processes in an IJV can cement the IJV relationship or weaken the IJV relationship, and thereby, lead to termination of the IJV.

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2. Theoretical Framework

In this chapter, based on the literature, a theoretical framework will be developed that explains how the external environment of an IJV can create JV dynamics, and how the parent companies use the IJV management control to counteract weakening effects on the IJV relationship. In so doing, I present the key concepts of the research question. First, the definition and formation of IJVs will be examined. Then, the key variables of the external environment which could affect an IJV relationship will be discussed. Next, the concept of IJV management control will be investigated, followed by a discussion of the concept of IJV dynamics. Finally, a conceptual framework will be developed.

2.1. Formation of International Joint Ventures

Broadly viewed, an IJV has been a popular mode for foreign companies to enter a foreign market in a host country (Beamish & Banks, 1987; Hennart, 1988). Hamel (1991) claims that resource complementarity of parent companies is the prime reason for the formation of IJVs. Yu and Tang (1992) further found that in IJVs owned by a company from a developed country and a company from a LDC, the contribution of the foreign partner is mostly technological knowledge, management expertise, and global support (Yan & Gray, 1994). Whereas, a critical knowledge contribution of the local partners revolves around an understanding of the local market, cultural and environmental conditions (Inkpen & Beamish, 1997). If the country of operation is a LDC, resource deficiency compounded with the environmental unfamiliarity makes it more challenging for the foreign parent company. Thus, knowing the local environment is crucial. The local parent company, which is familiar with the local environment, therefore, fulfills a pivotal role in an IJV.

Over the lifetime of IJVs, several structural changes and reconfigurations are likely to occur for various reasons (Yan & Gray, 1994). One major factor that could trigger changes in IJVs is environmental changes such as economic and political changes. Many researchers reported that environmental changes could lead to JV dynamics. However, the dynamic aspect of IJVs has received less attention in the literature. This study reports the dynamic processes of two IJVs that operate in a LDC, Eritrea. Specifically, it investigates IJV dynamics that resulted from the external environment, and how the parent companies use their bargaining power and IJV management control to counteract the weakening effects of these dynamics on the IJV relationship. Below, I will discuss the antecedents in the external environment whether and/or how they may stimulate IJV dynamics.

2.2. Environmental antecedents stimulating IJV dynamics

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instance, Khandwalla (1977) argues that the following three features of the organization's external environment are relevant: the extent to which it is uncertain, the extent to which it is malevolent or hostile, and the extent to which it is heterogeneous. He further provides a useful taxonomy of environmental variables such as turbulence (risky, unpredictable, fluctuating, and ambiguous), hostility (stressful, dominating, and restrictive), diversity (variety in products, inputs, and customers), and complexity (rapidly developing technologies). Furthermore, the external environment is characterized as dynamic in nature (Luo & Tan, 2003). Environmental dynamics refer to the extent to which various environmental segments (e.g., economic, regulatory, competitive) are variable and unpredictable. According to prior studies (e.g., Yan & Gray, 1994), the dynamic nature of the external environmental could cause dynamic processes over the lifetime of IJVs. Hence, drawing on the literature, three environmental variables are predicted to likely stimulate the emergence of dynamic processes in an IJV. These variables are (1) environmental uncertainty; (2) environmental hostility; and (3) external pressure. Below I will describe how these variables can stimulate IJV dynamics.

2.2.1. Environmental uncertainty

Environmental uncertainty is the “most widely studied environmental factor, especially in contingency-based research” (Chenhall, 2003, p. 137). It appears as the fundamental problem for complex organizations such as IJVs. Environmental uncertainty refers to the changes in the environment that the parent companies cannot foresee (Lu & Hébert, 2005). Lu and Hebert (2005) reported that operating in the new environment increases the level of uncertainty faced by the parent companies. Thus, IJVs established in culturally distant countries encounter large knowledge barriers regarding local culture and social norms. Beamish and Lupton (2009) argue that managing IJVs is complex as cultural differences could make communication, decision-making, and managing personnel more challenging.

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appears as adverse selection, moral hazard, shirking, sub-goal pursuit and other forms of strategic behavior. (Potential) opportunism may incur high transaction costs, for instance, with regard to prevention, security and conflict-solving costs (Williamson, 2000). If the parent companies are inclined to serve only their own interests by using forms of trickery and deceit, this could damage the IJV relationship. Thus, in the presence of a high level of environmental uncertainty, it is expected that there is a high risk of opportunism. Since the central aim of management controls in IJVs is to influence actors (i.e., the parent companies), in order to control opportunism and thereby, to promote the efficiency of transactions, it is expected that one of the parent companies could gain more bargaining power and control over the IJV. Such a situation could decrease the level of trust between the parent companies, thereby weakens the IJV relationship.

2.2.2. Environmental hostility

Environmental hostility concerns the degree of threat that various environmental components will deter firm operations and growth (Luo & Tan, 2003). It further refers to risky, unpredictable and stressful environmental situations, which can be caused by regional wars or crises (Khandwalla, 1977). A hostile environment poses a strong and direct threat to IJV stability and it deserves empirical investigation. However, researchers (for example, Lee, 2011; Luo & Tan, 2003) have only recently begun to explore security issues as an additional dimension in international business.

Luo and Tan (2003) claim that environmental hostility can limit the availability of resources. Luo and Tan (2003) further argue that when there is a high level of environmental hostility IJVs may face extra transaction costs. Moreover, a hostile environment may also instigate opportunism and hinders trust building. In order to prevent and combat opportunism, one of the parent companies may increase its control over the IJV and its bargaining power. Yan and Gray`s (1994) case study found that the partners` bargaining power is “consistent with, and positively related to the pattern in which management control is shared between parent companies” (p. 1481). Drawing on Yan and Gray, it is expected that a shift in the extent of control by one of the parent companies may lead to a shift in parent companies` bargaining power, which could reduce goodwill trust and a trust-oriented co-operation between the parent companies.

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literature, a hostile external environment is expected to cause JV dynamics in various ways. If the parent companies respond to the JV dynamics resulted from the environmental hostility in a way that fits the characteristics of the IJV relationship and the external environment, the dynamic processes are expected to strengthen the IJV relationship. Whereas, if the parent companies focus only on increasing their position of bargaining power and tighten their management control, this may weaken the IJV relationship. Because, if one parent company increases its bargaining power, this will imply that the bargaining power of the other parent company decreases. This could weaken the relationship between the parent companies.

2.2.3. External pressure

In the recent decades, multinational companies are being forced to consider the externalities of their cross-border activities. For these companies, it is impossible to deny the consequences of their actions and develop a stance on how they want to incorporate these into their policies. Some companies see this as a moral obligation or even a business opportunity. Others might be more reluctant, but they experience growing pressures from local communities, local governments and NGOs to report their corporate social responsibility (CSR) activities. CSR, according to the World Business Council for Sustainable Development (WBCSD), refers to ‘‘the commitment of a business to contribute to sustainable economic development, working with employees, their families and the local communities’’ (WBCSD, 2001). The fundamental idea of CSR is that companies have an obligation to work towards meeting the needs of a wider array of all stakeholders. Thus, CSR does not only address company shareholders, but also a commitment to all stakeholders including social and environmental responsibilities (Marrewijk, 2003).

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2.3. Management control in IJVs

Geringer and Hebert (1989) define control of IJVs as the process by which one entity influences and controls the behavior and output of another through a wide range of bureaucratic, cultural and informal mechanisms including power and authority. Even though there are other perspectives on management controls (e.g., Yan & Gray, 1994), for a better fit with the scope and focus of this study, I employ Geringer and Hebert’s definition. Specifically, the study is emphasized on the extent of control.

Geringer and Hebert (1989) characterized parent control in JVs as composed of three parts: (1) the mechanisms by which the parent companies exercise control, (2) the tightness of the parent companies` control, and (3) the focus of the parent companies` control. The mechanisms of control are the mechanisms that the parent companies use to exercise control (Geringer & Hebert, 1989). Control focus refers to the scope of activities over which the parent companies exercise control. The control focus might be regarded as broad when the parent companies exert control over the full range of activities undertaken by an IJV, or as narrow when the parent companies limit control to specific activities or processes perceived as crucial to attaining their strategic objectives (Pingli, Guliang, Hiroshi, & Chen, 2013). The extent of control refers to the degree to which a parent company exerts control over the IJV (Yan, 1998). Killing (1983) defined the extent of control in terms of the decision-making role of the IJV management. Depending on the role played by each parent company in the decision-making of the IJV, he identified three types of controls: dominant, shared and independent. By adopting a dominant control model, the dominant parent company manages the JV as if it was a wholly-owned subsidiary, while the other parent company plays a passive role. In a shared control JV, both parent companies play a meaningful managerial role and usually send managers to form a Board of Executive Directors that has real influence. In an independent JV, all the parent companies keep at a distance and the IJV management possesses a great deal of autonomy. Geringer and Hebert (1989) conclude that these dimensions (the mechanisms, the tightness, and the focus) are “complementary and interdependent” (p. 241). Geringer and Hebert further suggest studying IJV control as an integrative concept. However, for a better fit with the scope of this study, I focus on the extent of control. More specifically, how the extent of control is affected over the life of the IJVs.

2.4. Bargaining power

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involve a negotiated bargain between the parent companies. Yan and Gray (1994) claim that a parent company with a strong bargaining power can exercise more control over the IJV relationship. Such a parent company has more influence over the use of the IJV management control and can impose additional controls.

Over time, as partners' strategic missions, expectations, loyalties, and resource mix change, the balance of bargaining power in the IJV shifts (Harrigan & Newman, 1990). When the balance of power shifts, the need for cooperation between the parent companies may diminish or disappear. At this point, the IJV relationship could be affected negatively.

2.5. IJV dynamics

Do IJVs change over time? According to the reports of many researchers (e.g., Yan & Zeng, 1999; Yan & Gray, 1994), IJVs are characterized as dynamic organizational forms. Yan and Gray (1994) for example, observed that changes in an IJV's local environment could trigger changes in parent companies` bargaining power and management control. Moreover, Van der Meer-Kooistra and Kamminga`s (2015) recent case study show that in addition to antecedents located within a parent company and within the IJV relationship, antecedents located in the environment of a parent company and in the environment of the IJV relationship can create IJV dynamics, but they call for further study. Drawing on the extant literature, the predictions of this study are summarized below.

As discussed in section 2.2.1., if the IJV relationship faces a high level of environmental uncertainty, complex IJV dynamics could be created. One response to the dynamics resulted from environmental uncertainty is to attempt to reduce it through the exercise of a greater extent of control, both over the environment (such as through political lobbying) and over IJVs themselves (Child & Yan, 2003). Killing (1983) argues that a dominant control JV in an uncertain environment could create a mismatch between the characteristics of the environment and the IJV relationship, which could weaken the IJV relationship. Killing argues that in an uncertain environment a shared control JV, in which open discussions could create trust between the parent companies, is crucial. Therefore, drawing on the prior study, it is expected that an uncertain environment will be a trigger to IJV dynamics in which shifts in bargaining power positions and extent of control could negatively affect the IJV relationship.

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the parent companies. Kamminga and Van der Meer-Kooistra (2007) argue that a decrease in trust makes coping with unexpected situations difficult. Thus, a decrease in trust between the parent companies represents a threat to the IJV relationship. Therefore, a hostile environment is expected to be a trigger for IJV dynamics. The intuition is that a hostile environment could lead to information asymmetry where the local parent company obviously has a better local knowledge. Consequently, information asymmetry may encourage the local parent company to behave opportunistically. In order to prevent and combat such information asymmetry and opportunism, the foreign parent company could intensify its control and increase its bargaining power. This shift in the foreign parent company`s bargaining power and extent of control is expected to weaken the IJV relationship.

As mentioned earlier, in the presence of IJV`s good corporate social and environmental performance, no effects on the IJV relationship are expected. In contrast, where there is poor corporate social and environmental performance, the IJV could face various local or external pressures. Such conditions may cause IJV dynamics that could lead to higher monitoring costs. In such a situation, it may be possible to anticipate that the foreign parent company could execute dominant control and increase its bargaining power over the IJV. Such conditions are expected to weaken the IJV relationship.

2.6. Conceptual model

The literature discussed above provides insights on how the changes in a host country`s external environment can cause IJV dynamics. The conceptual model derived from the literature is depicted below in figure 1. The arrows indicate the relationship. On the left-hand side of the model, the independent variables are distinguished. These variables influence an IJV in various ways. If the environment affects the IJV management control and parent companies` bargaining power, it is also expected to affect the IJV relationship.

Figure 1

.

A Theoretical model of the IJV`s external environment and IJV dynamics

External environment

- Environmental uncertainty - Environmental hostility - External pressure

IJV dynamics

Shifts in parent companies` bargaining power and IJV management control

Effects on the IJV

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3. Research Methodology

This chapter discusses the research methodology and the research design. Below, the case study method and the process of selecting cases will be presented. Thereafter, the final section presents the data collection methods and the data analysis.

3.1. Case study method and selection of cases

This research conducted an in-depth case study on two IJVs between a parent company from Canada and a parent company from Eritrea. Both IJVs are located in Eritrea. The first IJV, named IJV Bisha, is owned by a Canadian company (the foreign parent), and an Eritrean company (the local parent). It was established in 1997 and it is the first IJV to operate in Eritrea. The second IJV, named IJV Asmara, was owned by a parent company from Canada, and a parent company from Eritrea. This IJV was established in 2003 and has been terminated in November 2015. Most studies on IJVs have been focused on terminated IJVs, whereas this study examines both an existing and a terminated IJV which helped the study to better understand IJV dynamics over the lifetime of an IJV. In particular, this study focused on IJV dynamics that resulted from the external environment.

The reason for selecting the case study method over other research methods was twofold. First, as Ahrens and Chapman (2006) notes, a case study tries to “position and interpret practical phenomena” in order to contribute to theory. Second, a case study allows the study to track the development of the IJVs over time which benefits the study with an in-depth insight into understanding how the external environment could cause IJV dynamics.

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agenda. Despite such difficulties, the continuous contact with some of the high ranking employees of these IJVs facilitated the data collection and helped to increase the reliability and richness of data.

3.2. Data collection

In the course of undertaking the study, different methods of data collection were employed. The main data collection methods were interviews and archives. Archives such as data from internal documents and official annual reports were collected and analyzed as a starting point for the interviews. Thereafter in-depth interviews have been conducted with people who took part in the events studied. The interviews were semi-structured and focused on the key changes or developments of the IJVs, resulted from the external environment. Questions guiding the discussions were open-ended, allowing the freedom to probe as much information as possible. However, in order to retain focus, the openness of the interviews was bounded by the research question. The interviews were conducted via Skype and phone-calls and lasted between 60 and 90 minutes. All the interviews were conducted between September 2015 and February 2016. All interviews were audio-recorded and transcribed verbatim. In order to avoid steering the interviewee in a certain direction and subsequently bias the research results, no further information rather than the interview questions with regard to this research was given. The individual interview questions and an overview of the interviews held and the respective positions of the interviewees can be found in appendix A and appendix B on page 31, respectively.

3.3. Data analysis

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4. Results

Guided by the preliminary theoretical framework of this study, this chapter presents the evidence found from the qualitative data analysis in order to answer the research question. To give some information about the context of the IJV relationship, a brief introduction about the establishment of the two case IJVs is presented. Subsequently, examples of IJV dynamics that occurred during the life of both IJVs and resulted from the external environment are reported and analyzed. In these examples, I will describe the antecedents in the external environment that led to IJV dynamics, and the resulting IJV dynamics, including the effects on the extent of control and the parent companies` bargaining power. In analyzing the findings, particular attention is paid to how the environmental variables set out in our theoretical framework affected the IJVs.

4.1. Examples of IJV dynamics caused by the external environment

Previous studies report that changes in an IJV`s local environment, particularly in government policies, can create uncertainty and thereby cause IJV dynamics (e.g., Yan & Gray, 1994). This study aims to examine how the case IJVs, specifically their parent companies` bargaining power and extent of control, and the IJV relationship had changed/affected since their formation to the date of the study. In the following sub-sections, I will describe and analyze the dynamic development of each IJV, including how the parent companies use the IJV management control and the resulting dynamic processes in the IJV relationship.

4.2. IJV Bisha

4.2.1. Establishment of IJV Bisha

IJV Bisha is a mining JV producing world-class copper, gold, silver and zinc. The IJV was set up in 1997 by a Canadian multinational, “Nevsun Resources Ltd.”, and an Eritrean company, “Eritrea National Mining Corporation (ENAMCO)”, the local parent company. The Canadian and Eritrean company each have a 60% and 40% shareholding, respectively.

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Mandeb which connects the Red-Sea and Indian ocean, the IJV benefits from various advantages such as good infrastructure and cheap access to the international market, which enables the IJV to operate with low costs.

When IJV Bisha was formed, both parent companies evenly contributed to the IJV. The foreign parent company had technological expertise. The local parent company, on the other hand, had access to the local resources such as the physical resources, local government connections, and local environmental knowledge. Hence, both parent companies enjoyed equal bargaining power and control over the IJV. In the course of the relationship, changes in the local environment had altered various changes on the IJV relationship. These changes in the local environment and the resulting IJV dynamics are summarized below.

4.2.1.1. IJV dynamics caused by environmental uncertainty

At the beginning of the IJV`s operations, both parent companies contributed to the IJV equally. The foreign parent company contributed technological knowledge and know-how, whereas the local parent company contributed local knowledge. During this initial stage of the IJV, the level of environmental uncertainty, especially from the perspective of the foreign parent company was high. This is because the foreign parent company was unfamiliar with the host country`s environment and had difficulties in predicting the effects of the external environment on the IJV`s production. Since the local parent company was state-owned, the foreign parent company had high expectation with regard to access to local information. From the perspective of a foreign parent company, a key concern in IJVs is the mitigation of environmental hazards related to the unpredictability of the local environment. Hence, in order to understand the local environment (e.g., the local culture, labor market), and thereby, mitigate hazards from environmental uncertainty, the foreign parent company was dependent on the local parent company. Thus, both parent companies had evenly distributed bargaining power and a shared control over the IJV.

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bargaining power and management control. As pointed out by Williamson (1985), an important objective for parent companies is to choose an effective management that minimizes transaction costs, and thereby enhances efficiency. Hence, as one of the interviewees mentioned, the foreign parent company had started to control the day-to-day activities of the IJV very seriously. For instance, the foreign parent company fired various managers of the IJV who were recruited by the local parent company. Over time, the foreign parent company was also able to understand the local environment. As a result, its dependency on the local parent company had decreased, and its bargaining power had significantly increased.

To sum up, there was a significant shift in the parent companies` bargaining power and extent of control of IJV Bisha. These shifts further reduced the opportunistic behavior of the local parent company, and thereby reduced the associated monitoring costs. Important to mention, the shift in parent companies` bargaining power and the shift in the parent company which executes control over the IJV recovered the relationship between the parent companies. As an illustration, at the beginning of the IJV, there was goodwill trust between both parent companies. In the course of the relationship, the opportunistic behavior of the local parent company decreased the level of trust between the parent companies. However, since the foreign parent company became dominant over the IJV, the data show that the IJV relationship was stable again. This illustrates the prediction that a high level of environmental uncertainty could stimulate IJV dynamics as discussed in section 2.2.1 on page 4.

4.2.1.2. Inter-firm conflict resulted from external pressure

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The social and environmental policies adopted by the IJV Bisha reflect global standards with regard to safety, human rights, community, environment, and mine closure. As the corporate social responsibility vice president noted:

“Ethical conduct is a fundamental value for IJV Bisha. Non-compliance with the Code of Ethics is unacceptable with us.”

The IJV claims that it adheres to the national and international standards of environment and human rights protection. As the IJV`s CSR vice president explains:

“IJV Bisha adheres to numerous national and international policies of environmental management, health and safety, employee relations, and social responsibility”

Despite these claims, evidence was found that the IJV`s corporate social performance was unreliable. In particular, the IJV had been accused of its poor corporate social performance, including respecting the basic rights of its employees. In November 2014, three Eritrean individuals who claim to have enslaved and forcefully worked for the IJV filed a lawsuit to the Canadian Supreme Court. This conviction specifically focused on the foreign parent company. They alleged that the company was complicit in the use of forced labor. They claimed that they worked at the Bisha mine against their will and were subject to “cruel, inhuman and degrading treatment”. They further alleged that they were forced to work long hours and lived in constant fear of threats of torture and intimidation. This lawsuit is the first in Canada where claims are based directly on violations of international law.

Even though the foreign parent company rejected the allegations as “unfounded” and vigorously defended itself, a committee selected by the United Nations Human Rights Office also reported similar results which support the allegation. Consequently, the foreign parent company was accused of using forcefully conscripted local workers with no payment. As a result, the foreign parent company`s reputation was damaged. The foreign parent company, thus, blamed the local parent company as it was the local parent company which was responsible for recruiting local workers. This resulted in a more tight control by the foreign parent company over the IJV`s activities. For instance, the recruitment team which was formed by the local parent company was replaced by representatives of the foreign parent company. Since the local parent company objected such a control highly dominated by the foreign parent company, a high tension was created between the two parent companies, and the level of trust between the parent companies had significantly decreased. This situation led to conflict and drastically weakened the IJV relationship.

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This increase in the dominance of control by the foreign parent company had some impacts on the IJV relationship, particularly the local parent company was not happy with these conditions. It weakened the communication between the parent companies, and thereby led to information asymmetry, distrust between the parent companies, and weakened IJV relationship.

4.2.1.3. Strong IJV relationship resulted from environmental hostility

When IJV Bisha was formed, both parent companies had an evenly distributed bargaining power. However, over time, when the foreign parent company started to understand the local environment (for example, the local culture and labor market), its bargaining power increased. Over time, specifically from 2000 until 2006, when the host country faced a regional war and an economic crisis, the IJV was very much at risk. Subsequently, the foreign parent company had to look for ways of either leaving the IJV or safeguarding it. Nevertheless, the state-owned local parent company provided some mechanisms of protecting the IJV. The local government took several measures to protect the production site. One of the main measures was that the government deployed some members of the Eritrean army around the production site, who protected the IJV so that it could continue its operations.

After a few years, another situation occurred which strengthened the bargaining power of the foreign parent company. On December 23, 2009, the United Nations Security Council (UNSC) imposed a sanction (known as 1862/2009) against the local parent company (the government of the State of Eritrea), accusing it of some political and security instabilities in the region. This sanction comprised strict rules that prevented the local parent company from any business transactions, including purchasing explosive materials which are vital for the operations of the IJV. It had also various negative consequences on the host country`s business activities, which shrinked the overall economy of the country. As the IJV`s major activities and profits mainly depend on the exploration of precious metals, explosives are very vital for the continuation of the IJV. In this case, the foreign parent company had better possibilities to overcome these obstacles and resource deficiencies. The foreign parent company could buy the explosives needed for the IJV from foreign countries and import it to Eritrea via sea ports of the countries that are allies or friends of Eritrea, for example, China, Russia and United Arab Emirate.

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parent company to contribute its duties or obligations to the IJV. Being dependent on the foreign parent company was the only alternative for the local parent company.

Another major environmental development which affected the IJV relationship and offsets the parent companies` bargaining power occurred on March 20, 2015, when an unknown terror group attacked the production site. This was a big shock to both parent companies, especially to the foreign parent company and hence, created a high level of uncertainty. This attack had various impacts on the IJV`s operations. First, some technical repair for the machineries which were damaged during the attack on the production site had to be made. Second, in order to ensure the safety and security of the personnel and the entire production site, additional safeguarding mechanisms, for example, additional security personnel had to be employed. All this resulted in an increase in the operating and monitoring costs. Furthermore, as the profitability of the foreign parent company largely depends on the profits of IJV Bisha, its stock price was drastically reduced.

Over the next days, the Board of Directors, which comprises three representatives of the foreign parent company and two representatives of the local parent company, conducted an emergency meeting. In this meeting, the representatives of the foreign parent company found that co-operating with the local parent company would be a vital source of local information, and thereby preventing further environmental threats. The contribution of the local parent company, though initially not valued by the foreign parent company, was then acknowledged as a critical asset. As such, the local parent company had gained power. As one of the interviewees reflected:

“We should do everything together. Even though it is clear that we (the foreign partner) are in a dominant position, it is better to exercise balanced power in a way that benefits the IJV.” As a result, although the ownership share remained as before (60% to 40%), the parent companies started to exercise a shared control in which they enjoy evenly distributed bargaining power. Ultimately, the shared control became effective and cemented the IJV relationship, which enabled the IJV to continue earning high profits. As one of the interviewees pointed out:

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the other hand, in spite of these high costs and low revenue, the foreign parent company preferred to co-operate and build a good relationship with the local parent company. Hence, the local parent company`s bargaining power increased. As a result, both parent companies started to exercise shared control over the IJV. As one interviewee pointed out:

“When the foreign parent company exercised dominant control over the IJV, the information exchange and trust between the parent companies were decreased. Thus, we (the foreign parent company) decided to share equal power and control over the IJV with ENAMCO (the local parent company),

and thereby improved the relationship’’.

The above adjustments in the bargaining power and extent of control engendered good co-operation among the parent companies and strengthened the IJV relationship. This illustrates the prediction that environmental hostility could cause IJV dynamics as discussed in section 2.2.2 on page 5. Moreover, it confirms Van der Meer-Kooistra and Kamminga`s (2015), and Yan and Zeng`s (1999) claim that JV dynamics can cement the JV relationship. Below, table 1 gives an overview of the key events during the lifetime of IJV Bisha.

Table 1 Key events during the lifetime of IJV Bisha.

1997

1998

2004

2009

2015

Nevsun and ENAMCO started joint exploration

Start of the war between the host country and Ethiopia, which increased the level of uncertainty

Nevsun and ENAMCO signed

an agreement on IJV Bisha, and the official start of the IJV`s production -Replacement of several managers from the local parent company by managers from the

foreign parent company, which

then introduced tight control over the IJV`s operations

UN sanction on the local parent company which prohibited the local

parent company from any transactions. This resulted in higher operating costs. It also enabled the

foreign parent company to gain more bargaining

power

Lawsuit against the foreign parent

company for violation of human

rights in the IJV. This led to higher costs, reputation damage, and also weakened the

relationship between the parent

companies - Bomb attack on the production site,

resulting in higher costs, shifts in parent companies`

bargaining power and control, which

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4.3. IJV Asmara

4.3.1. Establishment of IJV Asmara

IJV Asmara is a mining JV which develops precious metals such as copper, zinc, gold, and silver. The IJV was established in 2003 by a Canadian multinational, “Sunridge Gold Corp.” (the foreign parent company), and an Eritrean company, “ENAMCO” (the local parent company). When the IJV was formed, the Canadian and Eritrean company each had a 70% and 30% shareholding, respectively. Nevertheless, In the course of the relationship, it shifted to 60% and 40%.

At the early stages of the IJV, both parent companies contributed to the IJV. However, the contribution of the foreign parent company was bigger than that of the local parent company. While the foreign parent company contributed the vital technological and management expertise, the local parent company provided local information such as information about the local culture. Hence, the foreign parent company had dominant control over the IJV.

Even though the IJV had claimed a promising profit in 2016, the decade-long partnership turned sour in November 2015. The foreign parent company decided to leave the IJV, and the IJV officially terminated by the end of 2015. Below, I will describe whether or how antecedents in the external environment have affected the IJV over its life.

4.3.1.1. IJV Asmara and the environmental uncertainty

During the first period, the IJV faced a high level of environmental uncertainty. The foreign parent company contributed technological knowledge and management expertise to the IJV, which was crucial for the IJV’s operations. Because of its crucial contributions, the foreign parent company had a dominant bargaining power and tightly controlled the IJV. Nevertheless, in order to reduce the level of environmental, local information became much more important. Hence, the contribution of the local parent company became a great asset. Over time, the local parent company gained more bargaining power.

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power, it can be concluded that no significant effects on the IJV relationship caused by the high level of environmental uncertainty were observed.

4.3.1.2. IJV Asmara and the environmental hostility

In contrast with the previous case (IJV Bisha), IJV Asmara was hardly affected by the local environmental hostility the host country continually faced. The main reason that the IJV remained unaffected could be the location of the production site. Since the production site was located close (nearby) to the capital city of Eritrea in the center of the country, the IJV`s operations faced no cross-border security threats from the neighboring countries. Hence, the operation of the IJV was highly secured and the IJV operated with less safeguarding costs. Furthermore, as the operations of the IJV were transparent and straightforward, the information asymmetry between the parent companies was low. As such, the level of trust and cooperation between the parent companies was good. This enabled the parent companies to strengthen the IJV relationship. As one of the interviewees said:

“Both parent companies were cooperative to each other. Thus, the IJV remained stable during almost all its lifetime”

In sum, the hostility in the region of the host country did not lead to changes in the IJV relationship.

4.3.1.3. The end of IJV Asmara

During the early stages of IJV Asmara, corporate social and environmental performance programs were designed and both parent companies started to implement them accordingly. These programs were developed in accordance with the local standards (National Environmental Assessment Procedures & Guidelines), as well as international standards (Equator Principles for Social and Environmental Impact Assessment). However, the fact that the IJV Asmara production site was located near some of the largest cities of the host country hampered the operations of the IJV in several ways. Firstly, given that the protection of the local community and the environment was important, it was unlikely to operate at low operating costs. In order to reduce the ecological footprints of the IJV on the local society and the natural environment, the parent companies had to use various protection mechanisms. For example, to reduce local pollution, the IJV reallocated part of the production process to another foreign country. This resulted in higher transaction cost.

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technology expertise and management skills. Hence, it had demanded an increase in its share ownership from 33% to 50%. These interventions of the local government over the IJV weakened the level of trust between the parent companies and created tension between the parent companies. On November 2015, the foreign parent company left the IJV, and the IJV had come to an end.

In an interview, one of the highly ranking officials of the foreign parent company and the IJV highlighted that leaving the IJV was the best option for the foreign parent company. He further explained it in the following way:

“Under the continuing challenges from the environment, it is difficult to have sufficient profit. Thus, we believe that this (leaving the IJV) is the best option for us.”

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Table 2 Key events during the lifetime of IJV Asmara.

2003

2009

2012

2015

Establishment of IJV Asmara Sanctions on the local parent company which raised the transaction costs, but did not affect the

IJV relationship

Intervention by the local government which weakened the

IJV relationship

Termination of IJV Asmara

5. Discussion

After having described and analyzed various developments on the IJVs` local environment during the life of IJV Bisha and IJV Asmara and their effects on the IJV relationships, this section will discuss the case findings and, based on these findings, elaborate on the theoretical and practical contributions of this study and revise the initial theoretical framework.

Concerns about the dynamic aspects of IJVs have been repeatedly voiced by several researchers. These concerns are the main motivation for this study. By conducting two comparative case studies, this thesis investigated IJV dynamics resulted from the external environment over the lifetime of an IJV.

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relationship. In contrast with the first case, the second case remained stable for many years and showed that environmental uncertainty caused hardly any change. For example, as mentioned by one of the interviewees, the IJV relationship remained strong and trust based for almost ten years.

Second, despite both IJVs operated in a similar context with the same degree of environmental hostility, the findings from the two cases are contradictory. The first case showed that the hostility in the host country engendered several changes, which ultimately influenced the IJV`s transaction costs, the parent companies` bargaining power and control, and the IJV relationship, which confirmed the theoretical framework of the thesis. In the second case, it was the behavior of the local government that affected the IJV relationship and led to the end of the IJV. The external environment did not influence the IJV relationship which contradicted the theoretical framework of the thesis.

The third remarkable finding of this study is that it uncovered the overseen inter-connectedness of an IJV and an IJV`s impact on the host country`s local community and the natural environment. The study reveals that the bad corporate social and environmental performance of the IJV created external pressures and, thereby, weakened the IJV relationship. With respect to the first case, its corporate social performance did not meet the international requirements. The foreign parent company, therefore, was accused of violations of international human rights law. This led to high pressure from numerous foreign governments and human rights organizations. Such pressures had various effects on the IJV relationship. First, the parent companies started to blame each other. This created tension and inter-firm conflict between the parent companies. Subsequently, the inter-firm trust between the parent companies was damaged. As a result, it weakened the IJV relationship. Nevertheless, the findings of the first case showed that the personnel relationship between managers of the IJV played a crucial role in resolving tensions between the parent companies. After conducting meetings and intensive negotiation, they resolved the conflicts, started to exercise shared control and bargaining power. As a result, the IJV relationship was recovered.

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These findings may raise the issue of why one IJV is more dynamic than another. It could be argued that the external environment of an IJV matters. The findings show that environmental developments could lead to shifts in the parent companies` bargaining power, the extent of control and mechanisms of control. Furthermore, these shifts could be a vital reason for a weakened IJV relationship and the termination of the IJV. Therefore, although not necessarily with all IJVs, it could be concluded that dynamic processes could lead to the instability of IJV relationships. However, consistent with Gulati (1995), and Child and Yan (2003), as can be seen in the first case, a long operational history and good personal relationships enable an IJV to avoid or resolve severe conflicts.

Finally, agreeing with Van der Meer-Kooistra and Kamminga (2015), this study illustrates that IJV management control can be used to counteract the weakening effects on the IJV relationship. However, the findings of this study also showed that if the IJV management control used to counteract the weakening effects of the dynamic processes does not match the characteristics of the external environment and the IJV relationship, this mismatch could cause inter-firm conflicts, and thereby weaken the IJV relationship and ultimately lead to its termination.

6. Conclusions

IJVs are a rapidly growing organizational form that has received increasing interest from researchers in a variety of academic disciplines. Despite this attention, with a few exceptions (e.g., Van der Meer-Kooistra & Kamminga, 2015), the literature on IJVs has not addressed the issue of IJV dynamics in detail. Focusing on IJVs established between a parent company from a developed country and a parent company a less developed country, this study examined how the IJV`s external environment could cause IJV dynamics. By using the case study methodology, this study has focused on the dynamic processes resulted from the external environment in IJVs that operate in the context of a LDC during the life of an IJV relationship.

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developing countries, it extends the existing research on IJV dynamics, which has traditionally focused on IJVs in developed countries. Second, it adds to the relatively scarce findings on the LDCs on the area of IJV between developed countries and LDCs. It is also the first study to have investigated IJV dynamics in IJVs that operate in Eritrea. Thus, not only does this study expands our understanding, but it has also enabled us to see if the findings of this study are consistent with the findings of previous studies conducted on IJVs in a developed country context.

Overall the findings suggest that the external environment can create IJV dynamics in different ways. Consistent with the arguments of Van der Meer-Kooistra and Kamminga (2015), Beamish and Lupton (2009), and Yan and Zeng (1999), the first case reveals that dynamic processes in an IJV can cement a JV relationship. In contrast, the second case shows that IJV dynamics can weaken the IJV relationship. It shows that changes in the external environment (e.g., local government regulations) can create changes in transaction costs and, thereby, lead to shifts in bargaining power. These changes can further create tension between the parent companies and weaken the IJV relationship. If the parent companies do not use their IJV management control in a way that fits the characteristics of the IJV and its local environment, it can create various changes in the IJV. Consequently, these changes can weaken the IJV relationship, and thereby, leads to its termination. Therefore, on the contrary to Killing`s (1983) proposition in which he argued that JVs having dominant control by one partner are more successful, the findings of this study indicate that it is not only the extent of control that determines the success and stability of an IJV. Rather, it is the right fit between the relational characteristics and the characteristics of the external environment. Hence, environmental and relational concepts should be taken into account. The results, thus, support the proposition of contingency theory, which suggests that companies adapt their organizational structures and processes to the characteristics of their local environment (Otley, 1980).

The practical importance of the study lies in identifying the environmental variables (i.e., environmental uncertainty, environmental hostility, external pressure) that could affect the IJV relationship in a LDC and in addition, presenting practical evidence identifying the relative importance of these environmental variables from a practitioner perspective. But, it is important to note that in adopting an indicative rather than definitive stance, the findings of this study represent a point of departure from which further efforts to deeply investigate an IJV dynamics may proceed.

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data generated from interviews and archives, and both sources may present difficulties in terms of the reliance that can be placed on the findings. To some extent, the process of qualitative data analysis reflects analytical and interpretative biases inherent in undertaking qualitative research. These were minimized as far as possible by the adoption of protocols for data collection and analysis. A third limitation is the fact that this study is restricted to one country (i.e., Eritrea). It is conceivable that some of the results are affected by the context in which they were obtained. The country is characterized as an isolated and secretive country. Thus, this institutional setting might drive some of the results. While considerable care has been made, additional work is required to further validate the study.

In spite of these limitations, the current study represents an initial step in accumulating much needed empirical evidence on the dynamic aspects of IJVs, and the conclusions point to various avenues for future research. One is to test the extent to which the findings of this study accurately reflect the dynamic aspects of IJVs that are located in LDCs. Replication of this study to examine IJV dynamics in other LDCs and in other industries could extend the context, and therefore the transferability of the findings.

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Appendices

Appendix A: Interview questions

1) Do you experience any difference in operating in a less developed country, and operating in

the western developed countries?

2) Do you think operating in an unfamiliar environment affects the joint venture activities?

3) How would explain the leadership style of the joint venture during the initial stages/ first few

years of the partnership? Do you notice any changes in the structure management system yet? Is

there any involvement by the parent companies or does the joint venture operates autonomously?

4) How would describe the trust between the parent companies in the initial phases of the IJV?

And did you experience any behavioral change of any of the parent companies over the lifetime

of the joint venture?

5) Would you say that the fact that the host country is continuously alerted with war threats by

the neighboring countries, affect the joint venture activities and the IJV relationship?

6) What is the relationship of the joint venture with the local communities? Do you have any

contribution towards the local natural environment and the local communities? How and why?

7) Do you experience any external pressure, for example from the government or the local

people, with regard to the local environmental pollution caused by the IJV`s operation?

8) How do any environmental developments influence the joint venture operations and the IJV

relationship?

9) Do you find it easy to manage any external pressure? How does the IJV management board

counteract in case of any environmental threats?

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Appendix B: Overview of interviews

Joint Venture Parents Interviewees Number of interviewees Period IJV Bisha ENAMCO Controller 2 Oct 2015 Nevsun CSR v. president 1 Dec 2015

IJV Asmara ENAMCO Managers 2 Oct 2015 & Feb2016 Sunridge Gold VP business development 1 Dec 2015

International Joint Venture Dynamics