INTERNATIONAL JOINT VENTURES AND THE INFLUENCE OF CULTURAL DIFFERENCES ON GOVERNANCE MECHANISMS

(1)

INTERNATIONAL JOINT VENTURES AND THE

INFLUENCE OF CULTURAL DIFFERENCES ON

GOVERNANCE MECHANISMS

A CASE STUDY OF THE ABU DHABI OIL & GAS INDUSTRY

Mart Beune 1764462 Helper Brink 25A

9722 EG Groningen

Master Thesis Business Administration -‐ Strategic Innovation Management Supervisor: P.M.M. (Pedro) de Faria

Second Supervisor: I. (Isabel) Estrada Vaquero University of Groningen

(2)

ACKNOWLEDGEMENTS

This research could not have been completed without the help of certain people. There are a few people I would like to thank, because of their significant contribution to my thesis.

First of all, I want to thank my supervisor Pedro de Faria for his extensive support, flexibility and feedback during my research. However, foremost I want to thank him for the trust he gave me during the research, which has certainly helped me in completing this research.

Second, although being anonymous in this research, I would like to thank the interviewees for their willingness to contribute to this research and for their openness during the interviews. Without honest and reliable answers to my questions this research could not have been completed.

Last but not least I want to thank Myrte Lammers, as well as my parents, sister and friends, for their support and insights throughout my research.

(3)

ABSTRACT

International joint ventures (IJVs) are a popular form of strategic alliances with a particular challenge in terms of governance by the parent companies. Governance mechanisms are a way for the parent companies to get an adequate level of control and trust that is necessary to make the IJV successful. Although the current literature stream has identified a role of culture in the management of an IJV, the influence of cultural differences on governance mechanisms has not been examined. Based on a qualitative study of two international joint ventures cases in Abu Dhabi, between parent companies from different cultural backgrounds, this influence of cultural differences on several governance mechanisms is researched. This research adds to the current literature stream the link between Hofstede’s dimensions and the use and effectiveness of several types of governance mechanisms. Interviews have been conducted at each of the partner companies in the two IJVs. The main findings of this research are fourfold: (1) The use of ownership control as a governance mechanism in IJVs is found to be influenced by the score on the individualism dimension; (2) Relational mechanisms rather than contracts are the preferred governance mechanisms in IJVs within societies with a high score on the uncertainty avoidance dimension; (3) A high level of goal congruence is to be expected, with a stable and long-‐term IJV as a result, when two partners cooperate with one partner that scores high on the masculinity dimension and the other with a low score on uncertainty avoidance; (4) The match between the partner’s cultures on the individualism and uncertainty avoidance dimension influences the assignment of employees to the committees, or as secondees, in IJVs.

(4)

1. INTRODUCTION

Strategic alliances have become a popular organizational form for companies pursuing their objectives, to meet their goals and to enter new markets. However, although being popular, less than 20% of the JVs formed are successful (Charles & Charles, 1999), making the failure rate quite high (Bleeke & Ernst, 1991). This phenomenon instigates many scholars to study various aspects of alliance management, such as the governance of alliances or the process of safeguarding (Doz & Hamel, 1998; Chaturvedi & Gaur, 2010). In the current research stream, two distinct governance mechanisms have been identified, formal and relational (Madhok, 1995a; Powell, 1998). Formal governance mechanisms are designed to deal with transaction costs like opportunism, bounded rationality and uncertainty (Child, Faulkner & Tallman, 2005), whereas relational mechanisms are people based routines that enhance knowledge exchange. Both forms of governance mechanisms, formal and relational, are essentially aimed at taking care that the objectives of the parent companies are met (Hoetker & Mellewigt, 2009).

Challenges with governance are particularly present in a specific type of strategic alliance, namely an international joint venture (IJV). An IJV is a form of strategic relationship in which an independent legal entity is formed by two or more parent organizations of which at least one of the parents is headquartered outside the joint venture’s country of operation (Geringer & Hebert, 1989). IJVs require unusually high levels of commitment from each partner and therefore IJVs usually post perfect governance problems (Alter & Hage, 1993; Wilkens & Ouchi, 1983). Besides, the control and management of IJVs present a particular challenge when there is a large distance between the partners in terms of geography, culture and institutional environment (Aulakh et al. 1997; Peng, 1999). Although many scholars have identified a role of culture in IJVs, the influence of cultural differences on governance mechanisms in IJVs specifically has not been researched. In addition, this research links the Hofstede (1980) dimensions to the governance mechanisms as a way of providing insight into the actual differences that are present between certain cultures. As a result this research tries to explore the influence of cultural differences, between the parent companies in an IJV, on the governance mechanisms that are used:

Research Question: “How do cultural differences influence governance mechanisms in IJVs?”

(6)

which most international oil companies (IOCs) in Abu Dhabi belong, opposed to the national oil companies (NOCs). It is exactly this that suggests a specific role of cultural differences in the relationship between the NOCs and IOCs in an IJV. Interviews have been conducted in the identified IJVs within Abu Dhabi.

The case findings show a clear influence of cultural differences on governance mechanisms. Especially ownership control, contracts, project committees and secondees are highly influenced by the cultural differences of the parent companies. Using Hofstede’s (1980) dimensions, a key influence is found of the individualism and uncertainty avoidance dimensions on these governance mechanisms. Besides, the masculinity dimension is found to be important in reaching a high level of goal congruence.

This paper is further divided into five sections. The next section will provide the theoretical foundation of strategic alliances and IJVs, governance mechanisms that are often found in these ventures and the influence of cultural differences in IJVs. Hereafter the methodology section explains the case study as well as the data collection method and data analysis. Next, the result section provides the findings of the data analysis. Subsequently, a discussion will reflect the research findings in comparison to the theoretical background and propositions are drawn based on this. In the last section an overall conclusion will be provided and directions for future research, limitations and implications will be given.

(7)

2. THEORETICAL BACKGROUND

This section first addresses the concepts of strategic alliances and IJVs to get a good understanding of the organizational forms. Hereafter, the different governance mechanisms that have been identified are described. Subsequently, the influence of culture in IJVs is discussed.

2.1 STRATEGIC ALLIANCES

“Strategic alliances are links formed between two or more independent companies which choose to carry out a project or specific activity jointly by coordinating the necessary skills and resources” (Dussage & Garette, 1999). This basically means that firms form alliances aimed at pursuing mutual strategic objectives, through cooperative arrangements (Das & Teng, 2000).

Strategic objectives can be met in an infinite number of ways and with many theories as the fundament behind it. It all starts with a single firm having a corporate strategy, which reflects the mission and objectives that are set by the senior management of the company. When the corporate strategy is defined the question is raised how a company can gain advantage over its competitors, known as the competitive strategy. In the end, to achieve an advantage over its competitors, a company can choose several strategies. A company can (Child, Faulkner & Tallman, 2005): (1) Develop resources and capabilities internally, (2) outsource activities to search for new resources, (3) acquire other companies for their firm-‐ specific assets, or (4) it can form an alliance or joint venture (JV) in order to bring in new resources and capabilities from an unknown market or perhaps even from the partner.

Since the 1980s there has been a spurt in the numbers of strategic alliances between all kinds of firms. This spurt can mostly be explained by the major increase of alliances formed each year by American, European and Japanese companies (Faems, Van Looy & Debackere, 2005; Hagedoorn, 2002, Collins & Doorley, 1991). Some of the most popular forms of strategic alliances are JVs, R&D agreements and buyer-‐supplier relationships. These cooperation activities with other firms are opportunities to access new resources or capabilities, which can enhance the innovation process. Often, it is also a way to access the local market knowledge or sharing risk and costs (Cassiman & Veugelers, 2006).

If companies choose to pursue the strategy of forming an alliance or JV, and in order to have a satisfactory outcome with alliance success, shared objectives must be developed since corporate strategies and objectives can differ (Doz, 1996; Kanter, 1994). This research has a focus on IJVs and therefore the next section will describe this alliance type.

(8)

2.2 INTERNATIONAL JOINT VENTURES

Strategic alliances can take many different forms. Hagedoorn and Narula (1996) provide a good overview in which they separate two distinct groups: (1) equity sharing alliance, e.g. IJVs, or (2) contractual alliances, e.g. R&D agreements.

Das & Teng (2000) describe joint ventures as a popular form of a strategic alliance. However, a clear distinction needs to be made between the two. Alliances are not defined by any legal status but are mostly based on a contract, whereas a JV is an alliance endowed with a legal status that is distinct from that of the parent companies (Dussage & Garette, 1999). What basically happens is that two, or more, partners create a new company that will enter a specific market, with a specific activity. In this way both partners reduce their risk of investment (Das & Teng, 2000). IJVs then again are organizational entities created and managed jointly by foreign and domestic firms, each of which is economically and legally independent of the other (Meschi & Riccio, 2008; Shenkar & Zeira, 1987).

For multinational corporations (MNCs), IJVs are a good strategic option for those pursuing global expansion (Hergert & Morris, 1988). Most MNCs eventually form IJVs in order to gain a competitive advantage, to diversify risks and to gain access to new markets (Alter & Hage, 1993; Ghoshal, 1987). Besides, domestic firms often have the legitimacy and local market knowledge, whereas the MNCs bring technological skills and other global competences to the table (Alter & Hage, 1993). Another essential argument is that by forming an IJV the parent companies are able to blend their skills and knowledge into a stronger organization than if either parent acted independently (Jarillo, 1988).

Ventures are also a significant source of economic growth and innovation (Bygrave & Timmons, 1991; Kortum & Lerner, 2000). Besides, an IJV is the best organizational structure that facilitates learning since it is one of the best platforms to acquire certain knowledge (Lambe & Spekman, 1997; Park et al., 2008). Organizations can no longer expect to provide all the required resources and skills to achieve their objectives on their own or by acquire another company, with all the risks related (Petrovic & Kakabadse, 2003). Therefore, IJVs have become very common as companies are constantly looking for opportunities to expand their business, enter new markets or enrich the value they can deliver to their customers and investors (Beamish, 1993). IJVs are increasingly becoming a means to acquire critical assets of business like human resources, investments, market access, technologies and many more.

(9)

presence of two or more parent companies, which are often from different cultures and simultaneously cooperate and compete and thus have conflicting objectives (Schuler 2001; Yan & Gray, 1994). Therefore, monitoring through governance mechanisms is particularly important in IJVs because of this instability rate (Garg, 2013). This view is supported by Alter & Hage (1993) who argue that among strategic alliances, IJVs require unusually high levels of commitment from each partner and thus post formidable governance problems.

Governance mechanisms should eventually lead to a successful IJV, so apparently there are key determinants of success that exist. Some of the key determinants are identified in the literature, like mutual trust, goal congruence, extensive communication, a long-‐term orientation, and investments in relation specific assets. Governance mechanisms should support the creation of these key determinants to increase the chances of success in an IJV (Kumar, 2012; Mohr & Puck, 2005). Besides, it is argued that the fundamentals to success in

(10)

2.3 GOVERNANCE MECHANISMS

Although cooperation with other companies seems rather popular, alliances tend to have high instability rates and are much more disappointing than the successful story that is often described (Nilsson, 1995; Harrigan, 1988; Kogut, 1988). These instabilities and tensions between the partners in an alliance can be caused by many factors. However, to mitigate the risk of alliance instability, and to better manage the alliance, the parent companies can put governance mechanisms, also called safeguards, in place (Das & Teng, 2000). Governance mechanisms are control mechanisms that have the objective of bringing about the perception of fairness or equity among the parent companies in the alliance. The purpose of such a mechanism is to provide the control and trust that is necessary for the companies to believe that engaging in the exchange will make them better, at a minimum cost (Williamson, 1985). There are basically two types of mechanisms, (1) formal mechanisms, and (2) relational mechanisms (Lyons & Mehta, 1997; Rousseau et al., 1998; Garg, 2013).

According to Das & Teng (1998), governance mechanisms are implemented to influence the behavior of the companies and to increase predictability of the parent firm, which then minimizes opportunism and uncertainty. Opportunistic behavior can result in misrepresentation of capabilities or resources and not delivering or attempting to attract additional rents. All of this, including uncertainty about the partner’s behavior, results in high transaction costs, which must be avoided as much as possible according to the transaction cost theory (Child, Faulkner & Tallman, 2005; Williamson, 1985). In order to better manage the alliance, the parent companies can implement multiple governance mechanisms (Hoetker & Mellewigt, 2009).

2.3.1 FORMAL MECHANISMS

Firms in alliances tend to be more confident about partner cooperation when they feel they have an adequate level of control over their partners (Beamish, 1988; Sohn, 1994). This is because individual firms are self-‐interest seeking and may act opportunistically when the opportunity arises. To prevent this from happening, companies can activate mechanisms. Formal governance mechanisms are designed to deal with transaction costs like opportunism, bounded rationality and uncertainty (Child, Faulkner & Tallman, 2005; Deeds & Hill, 1998).

(11)

contract is potentially a good governance mechanism, its effectiveness depends on the country. In some countries, like for example China, the legal infrastructure is often incomplete or underdeveloped, which undermines the effectiveness of formal contracts as a safeguard (Zhou & Poppo, 2010). In these cases, cooperation often demands alternative safeguarding mechanisms in addition to formal contracts, like a high level of control.

Contracts, therefore, are the organizational arrangements designed to determine and influence what will be done ex ante, which is basically the same for non-‐recoverable investments, also known as asset specificity investments. If the IJV fails, most value of the investment will be gone, decreasing the potential of opportunism (Das & Teng, 1998). On the other hand, ex post deterrents could be for instance audits or quality control. These are safeguards against opportunism in the process of managing the IJV and although being a costly operation, it effectively sets the boundaries for the behavior of the partners in the IJV (Das & Teng, 1998).

In addition to this it must be noted that one parent company cannot have full autonomy in deciding what is best for the IJV, whether you have the majority ownership or not. Formal control therefore appears to be at odds with a trusting environment, an important outcome of relational mechanisms. So apparently, in IJVs, extensive contractual safeguards might be a sign of suspicion rather than trust. If this tends to dominate the relationship, it could affect the IJV in a negative way. Therefore, formal control is often the preferred type of control in other type of alliances than an IJV, like a contractual alliance (Das & Teng, 1998).

2.3.2 RELATIONAL MECHANISMS

Relational governance mechanisms are based on inherent norms that emerge from expected behavior of the parent companies as well as their internalized values (Heide & Miner, 1992; Monczka et al., 1999; Gencturk & Aulakh, 2007; Liu, Luo & Liu, 2009; Allred et al., 2011). Besides, relational mechanisms are people based routines and the implementation of such mechanisms enhances knowledge exchange (Jansen et al., 2006). This is of high importance because valuable knowledge is hard to imitate and therefore also to transfer according to Teece (1986). However, to be able to make full use of this exchange of knowledge, mutual trust and a significant amount of social understanding must exist (Hoetker & Mellewigt, 2009). Therefore, relational mechanisms are mostly aimed at enhancing and building trust, open communication, inter-‐firm adaptation, solidarity, social identification and cooperation (Eisenhardt, 1985; Hoetker & Mellewigt, 2009; Das & Teng, 1998).

(12)

employees (Garg, 2013). Besides, these mechanisms are aimed at mitigating opportunism that is potentially there and establish trust through repeated interaction, learning about each other and by developing personal ties (Macaulay, 1963; Hoetker & Mellewigt, 2009). Repeated interaction of individuals can eventually lead to inter-‐firm communication, certain routines, and may enforce joint action (Dyer & Singh, 1998; Mitchell & Singh, 1996; Gulati & Sytch, 2005). As a result, relational norms and mutual trust among the parent companies will be developed (Bertelli & Smith, 2010).

As noted above, the building of trust is considered to be key when it comes to relational mechanisms. Trust is the positive expectations about another’s motives in an alliance. In order to gain trust, partners in an IJV could try their best to achieve inter-‐firm adaptation, which is the adjustment of one’s own behavioral pattern in order to bring fit between the partners in the IJV and the environment (Heide & John, 1992; Hallen, Johanson, & Seyed-‐ Mohamed, 1991). To trust essentially means to take a certain risk and leave oneself vulnerable to the actions of the other. Researchers have argued that only in risky situations trust is a relevant factor (Deutsch, 1962; Kee & Know, 1970). Risk, therefore, is at the core of trust (Currall & Judge, 1995; Mayer, Davis & Schoorman, 1995). The benefit however of inter-‐firm trust includes lowering transaction costs, reducing the need for formal contracts and inducing certain behavior (Das & Teng, 1998). A shortcoming of trust is that it takes some time to overcome differences and to actually build mutual trust (Dyer, 1997).

Trust emerges from social interaction, which reduces transaction costs but also increases the likelihood of investment in asset specificity (Dyer, 1997). Asset specificity refers to the durable investments that cannot readily be redeployed to other uses and are made in support of particular transaction. The commitment of such assets locks the partners of the IJV into the give type of transaction. However, these investments are subject to opportunism and uncertainty, for which governance mechanisms will be used to mitigate this risk (Child, Faulkner & Tallman, 2005). Madhok (1995b) on the other hand argues that managing opportunism and relying on trust are two alternative approaches in managing IJVs, which is supported by Ring and Van de Ven’s (1994) view on the substitutive relationship between formal contracts, e.g. control, and psychological contracts, e.g. trust, in alliances. As Merchant (1984) points out, “good control means that an informed person can be reasonably confident that no major surprises will occur”.

(13)

Also, the process of goal setting is potentially a useful social control mechanism. When the parent companies interact quite often with each other, form a consensus on the goals that are to be met, they get to know each other better, and their incentive to deviate from the agreed objectives is significantly decreased (Hatfield & Pearce, 1994).

Governance Overview

The use of formal and relational mechanisms is a way for parent companies to mitigate risks and facilitation exchanges between the companies. Looking at the use of the different mechanisms, Ring & Van de Ven (1994) find that the use of formal mechanisms as a basis for mitigating opportunism is useful, but relatively short-‐term in the turbulent context of most IJVs. Dyer (1997) supports this view by arguing that formal mechanisms like contracts are effective for a finite period of time, but relational mechanisms, that enhance trust, on the other hand are more effective in the long run. Therefore, many alliances begin with the use of formal mechanisms and over time employ more relational ones (Dyer & Singh, 1998; Fryxell, Dooley & Vryza, 2002).

Das & Teng (1996) found that an equity-‐based alliance, like an IJV, is the right response to relational risks and more effective when it comes to sharing tacit knowledge (Kogut, 1988). This view is supported by Sheppard and Tuchinsky (1996) who note that “control is not exercised in the form of hierarchical authority but rather in terms of relationships between relative equals”, especially in network organizations. Cullen et al (2002) support this view with arguing that mutual trust is the core of IJVs since no contract can account for every issue that might arise and it is not feasible to rewrite the contract every time something occurs. It is in these moments that the parent companies must be able to fall back on mutual trust and commitment to keep the IJV running (Kale & Singh, 2009). Key to this is the flexibility and the willingness to accommodate deviations from the contract if necessary. A specific situation when this adaptation is needed could be when two different cultures meet and a potential cultural clash can take place (Sankar et al., 1995).

Even though the use of mechanisms develops over time in alliances, Grandori & Soda (1995) argue that IJVs often employ all the governance mechanisms that are described, due to its dynamic relationship. In addition, Das & Teng (1998) argue that in modern alliances, effective partner control appears to be dependent on the variety of formal and relational mechanisms that influence the behavior and decision-‐making within the IJV.

(14)

mechanisms are in play in an IJV. In appendix 1 a complete overview of the identified mechanisms is shown.

2.4 INFLUENCE OF CULTURAL DIFFERENCES

Kroeber & Kluckohn (1981) define culture as the transmitted patterns of values, ideas and other symbolic systems that determine the pattern of behavior. The term culture can refer to organizational culture or national culture. Organizational culture is highly influenced by national culture, which is the integrated personal values of people in society that reflects aspects of their personal culture, integrated in a national identity (Byrne & Bradley, 2007). Because of this, people naturally behave in a certain manner that is desired by the organization.

As already mentioned, the control and management of IJVs present a particular challenge when there is a large distance between the partners in terms of geography, culture and institutional environment. The influence of different cultures in the case of IJVs adds to the risk of misunderstanding and failure in cooperation (Aulakh et al., 1997; Peng, 1999). This again indicates the possible influence of culture on governance mechanisms in IJVs, which is supported by Sankar et al (1995) who point out that in IJVs managing these different cultures presents both a daunting challenge and potential opportunity. Besides, Chang & Taylor (1999) found that national culture was one of the key influences on the choice of mechanisms.

When two cultures differ in such a way that social understanding is hard to achieve, the efficiency of knowledge exchange decreases. Differences in corporate cultures, which are influenced by national cultures and industry cultures, hinder efficient knowledge exchange as well (Pizam et al., 1997). In addition, Julian, Wachter and Mueller (2009) note that the greater the difference among team members is on cultural factors such as nationality, country of education, and language, the less likely it is that team members are willing to openly provide new ideas and information. The existence of cultural barriers for interpreting not only words themselves, but also the context of it, greatly reduces the level of openness in communication. As we have just learned, open and high quality communication is a key factor in achieving a high level of knowledge exchange; so cultural differences potentially have a huge impact on the exchange on knowledge. Also, it takes a lot of time to overcome such differences, and it is essential to avoid miscommunication and achieve a high level of knowledge exchange to let an IJV succeed. As an example Rice (2003) mentions the Arab culture as being high context, relying considerably on complex nonverbal communication. This is exactly the opposite of the western culture, which can be considered fairly straightforward and more direct (Hofstede, 1980).

(15)

The blending or diffusion of culture is called acculturation. It can take the form of integration, assimilation, separation, or deculturation of the partner’s cultures (Nahavandi & Malekzadeh, 1988). A similar form of acculturation stress is likely to occur in strategic alliances. In IJVs, incongruence in partner preference may create acculturation stress, resulting in potentially unsuccessful cooperation. This may become especially serious for cooperation in which one partner plays a dominant role. Parent companies often do not want to loose their organizational culture, thus the blending of the partners cultures is a challenge. Socialization and training of alliance managers might be the key to achieve this, since it is all about getting to know each others norms and values and familiarize oneself with the other cultures (Das & Teng, 1998).

The relationships in IJVs are rather complex due to the hybrid nature and the mix of corporate and national cultures (Borys & Jemison, 1989; Shenkar & Zeira, 1992). For this, extra managerial competencies are required including the ability to see things from a broader perspective, to be able to bear in mind the objectives of all parent companies as well (Barham & Oates, 1991; Beamish et al., 1994; Yoshino & Rangan, 1995). Another important skill is the capacity to handle these cultural differences when you are, e.g., a member of the steering committee or a project group, which are considered relational mechanisms (Tung, 1993; Hoetker & Mellewigt, 2009).

Cultural diversity can potentially lie in many factors, which are a result of differences in religion, economic structure and the developmental stage of a country (Parkhe, 1991). However, a factor that is often put forward is the difference in communication, due to cultural differences. Bird and Osland (2005) even argue that differences in communication can eventually lead to a lack of trust. Whereas people from cultures with a direct style tend to say what they mean, those with an indirect style hide what they mean. Also, the neutral style of some cultures, like the “inscrutable” Asians, may be misinterpreted as untrustworthy (Bird & Osland, 2005). Commonly misunderstandings occur when all the parent companies are from different cultural backgrounds (Brito & Silva, 2009). Without a sense of mutual trust, partners often fail to work out issues that might arise because of the cultural differences.

The role of trust within alliances thus seems to vary culturally and is especially present in some Oriental and European cultures (Fukuyama, 1995; Thorelli, 1986; Collin & Larsson, 1993). Cultural differences are a potential barrier to trust, but it is not insuperable (Bird & Osland, 2005). Ting-‐Toomey (1999) argues that individuals are able to learn to be perceived as trustworthy in a different culture by: (1) understanding cultural preferences, (2) learning about the expectations of trust-‐based behavior in that culture and (3) matching those expectations in a consistent way. It is about bridging the gap between the usual, preferred, way of working and the other person’s way of working.

(16)

For a better understanding of how cultures can differ along certain variables the Hofstede (1980) framework is used. According to Hofstede (1982), culture is the collective mental programming of people in an environment. This is in line with the thought of having a national culture, because national culture is the integrated personal values of people in society and reflects aspects of their personal culture integrated in a national identity (Byrne & Bradley, 2007). With this said, Suliman & Moradkhan (2013), add that national culture has an overwhelming power to influence people’s behavior both at society and organizational levels.

Hofstede (1980) identified a couple of dimensions that is a framework for cross-‐cultural comparison and it basically describes the effects of culture on the values of its members, as well as how these values influence the way these members behave. These dimensions are often used to analyze how a culture works and gives an insight why people behave in a way that might possibly be of influence on the management of an IJV, e.g. the governance mechanisms. If societies are opposites of each other on the dimensions of Hofstede a potential clash can occur, because the people from these different cultures often have different norms and values.

In this research the original four dimensions of Hofstede are used to typify the different cultures. First of all, in Hofstedes (1980) framework, power distance is the extent to which the less powerful members of organizations within a country expect and accept that power is distributed unequally. This might possibly have an influence on the way an IJV works and needs to be management. If power distance is high in a society, this might be an indication that senior positions, and senior steering committee members, need to be taken by the parent companies; otherwise their influence is negligible.

Second, individualism is the degree of interdependence a society maintains among its members. A low score on this dimension indicates that business negotiations and dealings are typically made with family relationships, social contacts and social status in mind. Managers that are well connected across their business are able to get things done fairly quickly (Fadol & Sandhu, 2013). This all implies that trust and relationships in societies that score low on this dimension is key.

Third, masculinity is the dimension that indicates if a society is driven by competition, achievement and success. Being masculine is always wanting the best, being feminine is doing what you like best. Potential conflicts in business can arise when a masculine-‐based company cooperates with a more feminine-‐based company during the contract negotiations and committee meetings since, e.g., the one is more focused on targets and the other more on value (Hofstede, 1980).

(17)

Last, uncertainty avoidance is the level of tolerance for uncertainty and ambiguity within the society. Linking this to governance mechanisms can be best explained that in some societies a contract is merely a piece of paper and people believe more in spoken commitments and trust, whereas in other cultures contracts are the preferred way. Hofstede (1989) even suggests that differences between cultures on this dimension are potentially very problematic, and often even detrimental, for international cooperation activities, like an IJV. This is mainly because uncertainty is an inherent characteristic of operating abroad.

The current literature stream shows that IJVs, due to its dynamic environment, often employ all mechanisms (Grandori & Soda, 1995). Besides, it is proven that culture has a certain influence on managing an IJV. A literature gap, however, is identified in the influence of cultural differences on governance mechanisms in IJVs specifically. To identify differences between cultures, Hofstede’s dimensions are used since it offers a clear overview and shows real differences between cultures based on his framework.

The aim of this study is to create a richer understanding of the influence of cultural differences on governance mechanisms in IJVs by exploring the following research question:

(18)

3. METHODOLOGY

3.1 CASE CONTEXT AND DESIGN

The objective of this research is to give an insight into the influence of cultural differences on the governance mechanisms that are used in an IJV. Therefore, the purpose of this study is to contribute to the current literature on IJVs, governance mechanisms and cultural differences. The context of a study is often of high importance for the quality of the research. Researchers agree that cases must be selected in such a way that the cases either extend emergent theory or fill theoretical categories (Eisenhardt, 1989; Pettigrew, 1990). Extreme cases are best able to assist in this because the dynamics examined tend to be more visible than they usually are in other contexts (Pratt et al, 2006). In order to extend the existing theory, a case context has been chosen that fits this description, namely the Abu Dhabi oil and gas industry. In this industry many IJVs exist and besides the international oil and gas industry is among the most vital markets in the world. It does not only serve as a source of energy, it also provides the basic raw materials for many other industries (Katsioloudes & Isichenko, 2007). Within the Abu Dhabi IJVs quite often at least four partners reside who all originate from different cultural backgrounds. This is a perfect case to research the influence of cultural differences on the governance mechanisms used in an IJV. To illustrate a bit more that the chosen case is appropriate to conduct this research, an insight into the industry is given.

In the IEA figures, especially appendix 2, it can be seen that the Middle East plays a key role in the production of oil and gas. Furthermore, the UAE is considered to be a key player in the Middle East, as can be seen in appendix 3. Holding at least 6 percent of the proven crude oil reserves in the world, the UAE has the seventh place on the world ranking.1. The oil and gas industry of the UAE, and in especially Abu Dhabi, is of particular interest to conduct this research, since this industry covers about 40 percent of the country’s GDP, making it the most important industry locally.2 Most of the oil and gas activities in the UAE take place in Abu Dhabi and as a result most IJVs are located in this Emirate. This is particularly due to the existence of the powerful NOCs in Abu Dhabi, as well as the fact that a lot of IOCs have been present in Abu Dhabi ever since the discovery of oil, and subsequently invested heavily (Bealer & Bhanugopan, 2014). This requires these companies to have the right human capital, e.g. employees, to adapt to and cope with these strong national norms and values. As can be seen in appendices 4 and 5, the Middle East is the absolute number one when it comes to proven oil reserves and NOCs hold by far the majority of these reserves. This might be an indication of the existence of a certain dependency from IOCs to NOCs.

1_www.eia.gov

(19)

The cooperation between these NOCs and IOCs in Abu Dhabi is usually in the form of an IJV. Managing culture in cooperative forms, like an IJV, is considered to be a challenge because it is about blending and harmonizing multiple different cultures. In contrast to mergers and acquisitions, where often one culture dominances the other, in cooperative forms usually a mix of cultures is found, since all parent firms want to keep an influence in the cooperation (Das & Teng, 1998). This mixing of cultures is especially a challenge when the cultures are rather opposites of each other, as in the case of Abu Dhabi where the Arab culture meets many other cultures from the Western and Asian parts of the world (Aulakh et al. 1997; Peng, 1999). Most Asian cultures have characteristics of their own. Such cultural characteristics and their influence on business philosophy, strategic thinking, and daily operations have widely been documented (Eiteman, 1990).

To fully understand the culture of the UAE, of which Abu Dhabi is an Emirate, and the many other cultures that are present in IJVs, the cultural dimensions of Hofstede (1980) will be applied. Based on Hofstedes (1980) cultural dimensions an analysis is done on the UAE, as well as the country of origin that belongs to the partners in the researched IJVs namely Japan, the Netherlands, the UK, France and Portugal. A country’s comparison on the cultural dimensions can be found in appendix 6. As can be seen, the countries differ fairly on the dimensions. This is an indication that the case of Abu Dhabi is well chosen, when conducting a research in the field of cultural differences and their influence.

In order to ensure the suitability of the selected cases and accuracy of data, companies were selected according to predefined criteria (Fadol & Sandhu, 2011) namely, (1) the venture should be a JV between a local company and multiple foreign companies, (2) the parent companies should be culturally diverse, (3) availability of key decision makers for interviews, and (4) documentary records should be available and accessible.

Using these criteria, the GASCO and ADMA-‐OPCO ventures were selected. The reasons for selecting these specific IJVs are as follows: (1) the interviewer had access to most key decision makers involved in the ventures, (2) the interviewees are all heavily involved in the specific IJVs; which enhances reliability and relevance, (3) the GASCO and ADMA-‐OPCO are among the most important IJVs in Abu Dhabi, which will become clear in the short venture description below, and (4) the parent companies originate from many different countries and cultures, as supported by the Hofstede analysis in appendix 6.

GASCO

(20)

know it today. With its renewal in 2008, the agreement of this IJV is set to run until September 30, 2028. GASCO is one of the major players in the global gas and hydrocarbons market, conducting onshore gas processing and the transportation of gas and liquid products. GASCO is an IJV with a distribution of the shares of 68% ADNOC, 15% Shell, 15% Total and 2% Partex.3

ADMA-‐OPCO

The Abu Dhabi Marine Operating Company (ADMA-‐OPCO) is a major producer of oil and gas from the offshore areas of the Emirate of Abu Dhabi that originates from 1954 and shipped its first crude oil tanker in 1962. The crude oil production of ADMA-‐OPCO represents more than 40%, which is approximately 481,000 barrels per day, of the production of ADNOC, indicating the significance of this IJV. The parent companies of this IJV are 60% ADNOC; an Abu Dhabi-‐based company, 14.66% BP; a British-‐based company, 13.33% Total; a French-‐ based company, and 12% JODCO; a Japanese-‐based company.4

An overview of both IJVs is represented in appendix 7. Taken together, this sample and case context provided an excellent opportunity to enrich the current literature in the field of IJVs, governance mechanisms and the influence of cultural differences.

3.2 DATA COLLECTION

Data is primary collected by conducting semi-‐structured interviews with representatives from all parent companies in the IJVs, adding up to seven interviews (Kvale, 1996). Qualitative research, by doing semi-‐structured interviews, is chosen since Langer (1987) found that feelings, emotions, motivations and perceptions are best identified with qualitative research. In addition Corbin & Strauss (2008) note that the most data dense interviews are those that are partly unstructured. Besides, culture is considered a complex phenomenon that embodies values, beliefs, and norms, many of which are subtle and intangible, and therefore difficult to measure (Barkema, et al., 1997).

First, some general questions were asked to the interviewees to get a full understanding of the IJV. Then, the interviewees were asked which governance mechanisms were in place in the IJV. A separation in questions was made between formal and relational mechanisms, by building on insights from the theoretical background. Subsequently, questions related to cultural differences and the influence on governance mechanisms were asked. In appendix 8 a sample list of the interview questions can be found.

3_www.gasco.ae

INTERNATIONAL JOINT VENTURES AND THE INFLUENCE OF CULTURAL DIFFERENCES ON GOVERNANCE MECHANISMS