avoidance’ ‘ Setting up international joint ventures: The effect of uncertainty

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‘Setting up international joint ventures:

The effect of uncertainty avoidance’

Author: Erwin Geertman s 2802333

Faculty of Economics and Business, University of Groningen MSc International Business and Management 2015-2016

Final version Master thesis

Supervisor: P.J. Marques Morgado Co-assessor: M. Astarlioglu

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Abstract

Firms set up international joint ventures (IJVs) with local partners to expand their business internationally. Since IJVs have to deal with different countries, culture is an important external factor. Especially the cultural dimension ‘uncertainty

avoidance’ (= risk avoidance) could have effect on the process of setting up a IJVs, since IJVs are known as high risk investments. The combination of setting up an IJV and a cultural dimension is not studied yet. Thus, this study attempts to fill a research by examining the relationship between uncertainty avoidance and the time to set up an IJV. Therefore the research question is as follows: How does risk affect the process of setting up an IJV? The expectation is that higher uncertainty avoidance of the home countries of firms setting up an IJV, will lead to more time to set up an IJV. The value of the IJV is used as control variable. An interview is conducted to obtain information about the process of setting up an IJV. Using data from the database Zephyr of 189 IJVs all over the world for the period of 2011 until 2016, linear

regression analyses have been conducted. Although the relation seems to be positive, no significant relation has been found between uncertainty avoidance and the time to set up the IJV, neither between the value of the IJV and the time to set up the IJV. The study has proven to be of academic relevance by filling the gap in the theory about setting up IJVs and has set a base for future research. Furthermore, the findings of this research also have managerial implications and can be used for strategic decision-making before and in the process of setting up IJVs.

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List of tables and figures

Tables

Table 1: Comparison Globe Project and Hofstede model ……….…….. 13

Table 2: Descriptive statistics ……….……… 21

Table 3: Linear regression H1 ……….……… 23

Table 4: Linear regression H2 ……….………… 24

Table 5: Linear regression ‘difference between uncertainty avoidance’ …….………. 25

Table 6: Linear regression ‘Value of the IJV as moderator’ ……… 25

Figures Figure 1: World GDP: Real growth rate ……….. 8

Figure 2: Conceptual model ……….. 15

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1. Introduction

Research has shown that the last couple of years firms have become increasingly internationalized (Pagankar, 2008). The average expansion of world exports for example has grown with 6% average between 2000 and 2007 (Sang Ho, 2012). Firms internationalize more because of different reasons, such as the growing economy, growing competition and new technology fading away boundaries (Peng &

Pleggenkuhle-Miles, 2009). For example, from 2011 to 2013 the world GDP real growth rate has grown with 3,8%, 3,1% and 2.9%, respectively (Swanke, 2016).

When firms want to expand their business to a foreign country, firms often use alliances to enter new markets, obtain new skills and share recourses and risks

(Inkpen & Beamish, 1997). One of the critical choices is to choose the right entry mode/form of strategic alliance, each with their own risks and opportunities. Many firms use international joint ventures (IJVs) with local partners to expand their business.

A critical knowledge contribution of these local partners is the understanding of the local market, cultural and environmental conditions. Access to this knowledge is important in motivating a foreign partner to choose an IJV rather than full

ownership (e.g. acquisition or Greenfield). On the other side, the primary knowledge contribution of the foreign partner involves technology, global support and

management expertise (Inkpen & Beamish, 1997).

However, setting up an IJV is an extensive process with different strategic choices to make. In general, joint ventures (JVs) make for an interesting paradox: whereas the use is high, the percentage of JVs that fail is high too. Several factors could have influence and thereby influence the total time to set up an IJV. Since IJVs have to deal with different countries, cultural distance is an important external factor. Especially uncertainty avoidance (= risk avoidance) can have impact, since this

process is known as a high risk investment.

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applicable, although this study is focusing on the process of setting up an IJV, instead of managing established IJVs.

In this process risk and trust are important factors, which are related to uncertainty avoidance (Yuehua, Songhua & Xu’ang, 2011). Firstly, it could take a lot of time to find a partner who can be trusted and has the required capabilities. When a firm has little trust in its partner the perceived uncertainties increase. This could affect the time to set up an IJV by for example taking longer time to build trust or creating extensive contracts to minimize these uncertainties. A longer process means more resources for both partners.

There are different theoretical views on IJVs; for example resource based view, relational view and transaction cost economics. The resource based view argues that firms that are able to accumulate resources and capabilities that are valuable, rare, inimitable and non-substitutable. These resources will achieve a competitive advantage over other firms.

The relational view suggests that productivity gains are possible when partners are willing to make relation-specific investments and combine resources. This way they may realize an advantage over competitors who are unable or unwilling to do so (Dyer & Singh, 1996).

Transaction cost economics (TCE) argues that transaction costs determine the type of strategic alliance. Transaction costs, arising out of concerns of opportunistic behaviour of one of more partners, include the costs of search and negotiation, monitoring, and evaluation and enforcing. The choice to set up an IJV is in this theory an alternative to either market or hierarchy and is explained by coordination and appropriation costs. The latter control problem comes from behavioural

uncertainty and contracting problems. This could be resolved by joint ownership that defines the power of control by the partners (Chen & Chen, 2002). Those control problems are affected by different levels of uncertainty avoidance and are linked to the process of setting up an IJV. Higher levels of uncertainty avoidance will lead to perceiving higher levels of behavioural uncertainty and contracting problems, vice versa. Therefore TCE is applied to this study.

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focused on the processes after the IJV has been set up. Even if the process of setting up an IJV is mentioned in a study, this remains at a description of the process, its opportunities and its pitfalls.

However, cultural distance also plays a significant role in the literature of JVs. These studies, about cultural distance or a particular dimension of it, are about the effect on entry mode choices. This study, however, takes another perspective and is focusing on the process of setting up an IJV. The combination of setting up an IJV and a cultural dimension is not studied yet, although the success of collaboration depends on a good start. This process could cost firms a lot of resources, and this study is therefore a relevant contribution to the international business literature. The cultural dimension ‘uncertainty avoidance’ could be highly relevant because IJVs are known as high-risk investments. Firms want to face less risks as possible, and how firms interpret that depends on the level of uncertainty avoidance. Thus, this study attempts to fill a research gap by examining the relationship between risk and the process of setting up an IJV. Therefore the research question is as follows:

- How does risk affect the process of setting up an IJV?

The expectation is that a higher level of risk aversion of the foreign partners in setting up an IJV, will lead to more time to set up an IJV. This risk aversion is

measured by the cultural dimension ‘uncertainty avoidance’ from the Globe Project. As mentioned before, firms often use IJVs to internationalize, due the critical knowledge contributions of both partners. Despite these advantages IJVs are known as difficult to manage, due to the different backgrounds of both countries. Firms from countries with high levels of uncertainty avoidance will exclude as much

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2. Literature review

2.1. International joint ventures

To understand the research question several constructs have to be explained. First of all, an IJV; what is it and how is it set up? In this study an IJV is seen as an equity-based international joint venture. An equity-equity-based joint venture is an alliance/entry mode that combines resources from one organization or more, to create a new (additional) organizational entity, which is distinct from its partners who set it up (Geringer & Hebert, 1989). Firms typically choose IJVs for one of four reasons: to gain faster entry into a new market; to acquire expertise; to increase production scale, efficiencies, or coverage; or to expand business development by gaining access to distributor networks (Berting, 2016). It is considered to be an IJV if at least one parent’s headquarters is outside the venture’s country of operation. If the IJV is based in the home country of a partner, this partner is called the local partner. The partner from outside this country is called the foreign partner.

One of the factors causing the growing internationalization is the growing global economy (Peng & Pleggenkuhle-Miles, 2009). In Figure 1 the world GDP real growth rates are showed.

Figure 1

World GDP: Real growth rate

(http://www.indexmundi.com/g/g.aspx?c=xx&v=66)

Figure 1 shows that, except over 2009, every year the world GDP has grown. Due to the global recession in 2009 the world GDP real growth rate was negative over that year.

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mode is the channel which a firm employs to gain entry to a new international market (Zineldin, 2007). The options are: indirect and direct market entry; strategies without international investment; and strategies with international investment. Indirect and direct entries are often referred as exporting. Strategies without international

investment are licensing, franchising or other contractual agreements. These entry modes involve minimal amounts of partner interdependence and have a specific task. Each partner can end this agreement without high costs. Strategies with international investments are called strategic alliances and are bilateral agreements. These include JVs, Greenfields and acquisitions/mergers. In a Greenfield a firm starts its own company in a foreign country. In an acquisition the firm merges with or acquires a company in the host country (Zineldin, 2007).

There are several factors that play a role in the choice of an entry mode. Existing literature argues about the most important factors which play a role in this choice. Cultural distance, market attractiveness, uncertainty of host country

environment, legal environment of the host country, competitive situation, and culture of home country are the factors which play an important role (Morschett, Schramm-Klein & Swoboda, 2010). IJVs are chosen because setting up a complete operation via Greenfields or acquisitions are too costly and because of the local partner’s resources if they are useful for the foreign partner (Inkpen & Beamish, 1997). Cultural distance is argued to be important too. In a study about entry mode choice it is argued that a greater cultural distance reduces the likelihood of using entry modes that imply high resources commitment level (Quer, Claver & Rienda, 2007). Since IJVs combines resources from one organization or more, and therefore have a lower resources commitment level, the IJVs are studied in this paper in combination with a dimension of cultural distance (uncertainty avoidance).

As mentioned in the introduction section, firms often use IJVs to benefit from local partners. Understanding of the local market, culture and environmental

conditions are relevant for a foreign partner. The local partner’s motivation is often to learn from the knowledge about technology and management expertise, and to get global support (Inkpen & Beamish, 1997).

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partners in terms of geography, institutional environment and culture (Talman, 2009).

Another challenge for firms that is often mentioned in the literature is in the process of setting up a JV. In this process, selecting the ‘right’ partner is important, especially when the JV involves a firm’s core business (Geringer,1991). For IJVs from diverse cultures the partner selection process is even more complicated (Zutshi & Tan, 2008). An important factor in the partner selection is the complementarity of a partner (Geringer, 1991).

2.2. Setting up IJVs

After selecting the IJV as entry mode the process of setting up this IJV begins. This study uses the perspective of the foreign partner who wants to set up an IJV with a local partner from the host country. The process of setting up an IJV is divided in four steps: determination of strategy; partner selection; introduction and conditions; and writing the contract (Berting, 2016). The data used for this section is obtained from an interview with Mr. Joost Berting, Vice president and managing director EMEA Kennametal, and can be found in Appendix 1.

In the ‘determination of strategy’ a firm determines the goal of the IJV. It could for example be a project JV (consortium), a manufacturing JV or a

sales/distribution JV. In a project JV the venture is set up for a specific project. The JV will be dissolved when the goal is reached. Manufacturing JVs are partnerships that typically lead to greater distribution of some products. The latter,

sales/distribution JVs, will contain complex products, because otherwise a distributor will be chosen instead of a JV, due to the lower costs and resource commitment (Berting, 2016).

As mentioned before, the ‘partner selection’ is an important step in setting up IJVs. Here the foreign partner has to find the ‘right’ local partner from the

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In the ‘introduction and conditions’ the foreign partner starts with building trust with its selected partner. This is called a ‘people-process’; managers of both firms need a personal click. Without a personal click managers won’t take the risk in these big investments of both firms (Berting, 2016). Both partners also exchange their expectations of the IJV. In this step of the process the partners will have several meetings to get to know each other and to build trust. Especially when the (cultural) distance is large between the partners, partners will do research about each other. They check by for example other firms, banks, or even hire private inspectors whether it really exists what the other partner is offering. In this people-process it is obvious that being aware of each other’s culture improves this process and its duration (Berting, 2016).

The last step is ‘writing the contract’. This starts with writing down the first details of for example the division of ownership, control, financing, intellectual property and assets. After the ‘memorandum of understanding’ the final contract has to be written. In this part lawyers often come into the process. Every detail has to be in this contract and all perceived risks and uncertainties have to be excluded. Both partners want to step into the collaboration without any doubts or uncertainties. These contracts could be hundreds to thousands pages long, depending on the perception of uncertainties. When the value of the IJV increases, or the cultural distance is large, the contracts will be larger too; because the high risks involved, firms want to exclude every uncertainty in every detail (Berting, 2016).

2.3. Cultural distance: uncertainty avoidance

In international business literature, cultural distance generally refers to the

fundamental differences in norms and values between the home country of a firm and the host country of their foreign business (Chang, Koa, Kuo and Chiu, 2012). The frame work developed by Hofstede (1980) was the first which categorized national cultural issues into five different dimensions: power distance;

individualism/collectivism; uncertainty avoidance; masculinity/femininity; and long-term/short-term orientation.

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larger cultural distance will increase the cost of obtaining information and thereby the cost of monitoring. Moreover, the foreign partner has to commit more resources for personnel training, which also increases the costs. Due to the unfamiliarity with local culture, firms may make inappropriate decisions when the cultural distance is large (Quer, Claver & Rienda, 2007).

The Globe Project is one of the recent studies on cultural distance and is used in recent studies in that area, and will therefore be used in this study. The Globe Project is less criticized than Hofstede’s study. There are several critiques on

Hofstede’s study (Schwartz, 1999). First, because the survey used in the study was not designed to identify national cultural dimensions, and hence could contained

irrelevant questions. Second, the sample of countries does not reflect all national cultures. Third, the employees surveyed were not representative of the general population. Fourth, the data is obtained between 1967 and 1973. After this period of time, cultural changes have occurred worldwide. Finally, it is unclear whether the dimensions of Hofstede are the same across cultures (Schwartz, 1999).

The Globe Project measures culture at different levels with practices and values at the levels of industry, society and organization and is theory-driven, based on extensive academic literature (House, Javidan, Hanges & Dorfman, 2002). Its data is based on responses of around 17000 mangers from 951 firms within 62 societies throughout the world. The questionnaires were completed by group discussions, interviews and content analyses of printed media. The Globe Projects was designed to redo and expand the study of Hofstede and to test various

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Table 1

Comparison Globe Project and Hofstede model

Differences Globe Project Hofstede model Time period 1994-1997 1967-1973

Primary researchers

involved 170 1

Respondents Managers Non-managers and managers

Organizations surveyed 951 1 Industries Food processing, financial

and telecommunication services

Information technology Analysis Team effort Single effort

Project design US-based Dutch-based Number of cultural

dimensions Nine Four (original)

(Shi & Wang, 2011)

Uncertainty avoidance is the cultural dimension this study is focusing on.

Uncertainty avoidance is defined as the extent to which members of a firm or society strive to avoid uncertainty by reliance on social norms, rituals and bureaucratic practices to reduce the unpredictability of future events (House, Javidan, Hanges & Dorfman, 2002). This uncertainty avoidance is also applicable in setting up IJVs. Firms which sense high risks/uncertainties could be willing to take more time in this process to exclude these uncertainties (Berting, 2016).

2.4. Transaction cost economics

A JV occurs when two (or more) firms share some resources within a common legal entity (Kogut, 1988). Kogut (1988) calls it a selection of alternative modes by which firms can transact. Transaction cost economics (TCE) is a theory that explains why this mode of transaction can be chosen over alternative modes, such as licensing or acquisitions.

TCE is focusing on governance structures for transactions. The one with the lowest transaction costs will be the right governance structure. Transaction costs, arising out of concerns of opportunistic behaviour of one of more partners, are for example, costs of negotiation, costs of preparing and writing contracts, and

monitoring and enforcing those (Talman, 2009). These costs are connected with the scope of this study; setting up IJVs. Especially the examples of the costs of

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‘introduction and conditions’ and ‘writing the contract’, respectively. If negotiations are going tough and the contracts become more extensive as a result, the whole process of setting up the IJV will take more time. In this view TCE could use

uncertainty avoidance as a factor to determine to transaction costs, and is TCE linked to this study.

The choice of setting up an IJV is in this theory an alternative to either market of hierarchy and is explained by coordination and appropriation costs. The latter control problem comes from behavioural uncertainty and contracting problems and can be resolved by joint ownership that defines the power of control by the partners (Chen & Chen, 2002). Those control problems are affected by different levels of uncertainty avoidance. Higher levels of uncertainty avoidance will lead to perceiving higher levels of behavioural uncertainty and contracting problems, vice versa (Child & Yan, 2003). Higher levels of behavioural uncertainty can affect the setting up of an IJV, by for example getting to know each other and writing contracts; the higher the perceived uncertainties, the more partners want to exclude these. This could result in more time for the steps in setting up the IJV.

2.5. Conceptual model

To answer the research question how risk affects the process of setting up an IJV, uncertainty avoidance is chosen to measure risk, and the time to set up the IJV to measure the influence on the process of setting up this IJV. Figure 2 shows the proposed relationship between uncertainty avoidance and the time to set up an IJV. It is argued that a higher sense of uncertainty avoidance leads to more time to set up an IJV. In Figure 2 this is showed as uncertainty avoidance effecting the

implementation of the IJV; every step of the process of setting up an IJV can be affected by these cultural differences (Berting, 2016).

Also the control variable ‘value of IJV’ is added on the side of the IJV entity, because the total value of the IJV may have effect on the time to set up an IJV too. It is plausible to assume that IJVs of higher values contains more risks and

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Figure 2 Conceptual model

2.6. Hypotheses

The process of setting up an IJV faces different cultures and thereby different scores on cultural dimensions. As mentioned in the literature review, larger cultural distance means more time to execute processes and higher costs (Quer, Claver & Rienda, 2007). A higher score on the dimension ‘uncertainty avoidance’ from the Globe

Project will lead to firms reducing uncertainties as much as possible (House, Javidan, Hanges & Dorfman, 2002).

This phenomenon is also expected in the process of setting up an IJV. It is plausible to assume that each step of this process will be affected. Determining the right strategy of an IJV could take more time when firms want to exclude more uncertainties. Firms want to be sure to choose the right strategy and will go through this step more extensively.

Selecting the right partner is even more likely to take more time in this

situation. This is a considerable choice what cannot easily be reversed and which will lead to relatively high investments of both partners. Firms probably will execute an extensive research to find the ‘right’ partner.

In the so called people-process of ‘introduction and conditions’ culture plays an important role, so also the dimension of uncertainty avoidance. For example, firms or managers who score high on uncertainty avoidance are likely to take more time for building trust to their partners.

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extensive contracts which exclude as many uncertainties as possible. Contracts could partly due to the level of uncertainty avoidance differ from hundreds to even

thousands of pages (Berting, 2016).

In summary, and as mentioned in the conceptual model, the expectation is that firms from countries with a higher level of uncertainty avoidance lead to more time to set up an IJV. According to this expectation and to answer the research question how risk affects the process of setting up an IJV, the first hypothesis is developed:

- H1: Does higher uncertainty avoidance of the partners in setting up an IJV,

leads to more time to set up an IJV?

Another variable that could have effect on the process of setting up IJVs is the value of the IJV. It can be assumed that deals of higher values take more time to close, than deals that have relatively low values. In the latter case there are fewer risks for the firms, so they may want to close the deal as soon as possible to save costs. This means every step of the process of setting up an IJV is likely to be shorter. For example the step ‘introduction and conditions’ is likely to be shorter in time by a lower value of the IJV, since the partners face less risks and therefore will spend less time to build trust and investigate each other. Also the step of writing the contract is likely to be shorter in this situation. When the value and thereby part of the risks decrease, firms can see it as unnecessary to develop extensive contracts. Hereby they can save time and costs. The value of the IJV is therefore seen as control variable. According to this

expectation the second hypothesis is developed:

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3. Methodology

3.1. Research description

The research philosophy of this study is positivism. This means that is being assumed that reality exists independently of thing being studied. In practice this means that the meaning of phenomena is consistent between subjects (Newman, 1998). There are eight key features of the positivism approach that consequently apply to this research: the observer must be independent; human interests should be irrelevant; explanations must demonstrate causality; research process through hypotheses and deductions; concepts need to be operationalised so that they can be measured; units of analysis should be reduced to simplest terms; generalisation through statistical probability; and finally sampling requires large numbers selected randomly (Ramanathan, 2008).

According the positivism approach this study follows the deductive approach, where the hypotheses are developed upon a pre-existing theory and then formulates the research approach to test it (Silverman, 2013). This means that first the general theory and knowledge base is established in the literature review and then the specific knowledge gained from the research is tested against it. This is tested with mainly quantitative data. With quantitative data it is important to have a large set of data available, where this data can be measured using quantitative techniques, and where statistical methods of analysis can be used (May, 2011). Since this research is

conducted from existing materials, it follows the so called archival research strategy (Flick, 2011). Qualitative research is also conducted in the form of an interview; this to get more understanding of the process of setting up an IJV. Since this research uses both research strategies, it is called a mixed-method.

The time horizon of this study is cross sectional. The data is collected at a certain point. For the dependent variable, time of setting up an IJV, the date of announcement and the date of completing the IJV is collected. For the independent variable, uncertainty avoidance, the score of this cultural dimension on the Globe Project index of the both partners’ home country is collected. As control variable the IJV value is collected, since IJVs of higher values tend to take longer to set up due to the higher risks.

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data the focus is on how to effectively explain the characteristics of a population or a social phenomenon; this is called an explanatory research design (Saunders, Lewis & Thornhill, 2007). For quantitative part of the research larger samples will give more reliable results. The secondary data is subtracted from the database Zephyr. This study uses a sample of 189 IJV’s all over the world to get reliable results for the hypotheses of this study. Studies of Drogendijk and Slang (2006) about different cultural measurements and of Quer, Claver and Rienda (2007) about cultural distance and entry modes used samples of 156 and 371, respectively.

The qualitative data from the interview is primary data. Primary data is that which is derived from first-hand sources (Bryman, 2012). The interview about setting up an IJV was held with Mr. Joost Berting; Vice president & managing director of EMEA, Kennametal.

3.2. Sample and data collection

The data of the interview is used to describe the process of setting up IJVs; the starting point of this study. Mr. Berting accurately described all steps of this process and its features.

The database Zephyr is used to obtain the remainder required data about the IJV’s; the time to set up the IJV and the value of the IJV. This study started with a sample of around 400 JV’s which are completed in the last five years. The choice to select these recent JV’s is to capture the current situation around setting up JV’s to match with the data from the interview and to maximize the applicability of the results. The ‘local partners’ and the ‘foreign partners’ of the IJV’s are spread all over the world to capture an extensive variety of scores on the cultural dimension

‘uncertainty avoidance’.

After filtering the sample due to missing data, JVs which are not international, IJVs which are composed by more than two partners, and countries which are not in the Globe Project index, the final sample contains of 189 IJV’s which are set up by two partners from different countries.

3.3. Variables

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to fulfill all the steps of setting up an IJV: determination of strategy; partner selection; introduction and conditions; and writing the contract. Since there is no data available per step in this process, the total time is used in the analysis.

The independent variable is called ‘uncertainty avoidance’. The scores of this cultural dimension are subtracted of the Globe Project index. These scores can vary from 1(very low) to 7(very high). Both the score of the home country of the local partner and of the foreign partner of the IJV are used. Other researchers have also used the data of the Globe Project (e.g., House et al. 2002, Cornelius and Grove 2005), which confirms the suitability of the source for this study.

To test hypothesis 1 the cumulative score of the two countries are used,

because this study’s starting point is that higher perceptions of uncertainty avoidance will lead to more time to set up an IJV. As mentioned in the literature section, every step in the process of setting up an IJV could be influenced by the perceptions of uncertainty avoidance of both countries. This approached is chosen above the approach of analyse the differences between the two scores, because when for example two countries have both high scores the difference will be low, but the expectation is that the process of setting up the IJV will take relatively long. This is expected because when both partners want to exclude as much uncertainties as possible, the process will take longer than an IJV with partners with lower priorities to exclude those uncertainties.

However, to test this statement the regression analysis will also run with the differences between the scores. The reason to test this is that (cultural) differences between two parties can cause misunderstandings, which will lead to longer

negotiations (Inkpen & Beamish, 1997). Nevertheless, this problem seems to be applicable to cultural distance as a whole, rather than only the dimension ‘uncertainty avoidance’.

The third variable used in this study is the value of the IJV, since the

expectation is that the degree of the value of the IJV would influence the time to set up the IJV. There it is used as control variable in testing hypothesis 1. To test

hypothesis 2 it is tested whether a higher value of the IJV will lead to more time to set up the IJV. It is also plausible that the value of IJV affects the relation between

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3.4. Data analysis

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4. Results

4.1. Analyses for hypotheses

The descriptive statistics of the different variables are presented in Table 2. From the top down the variables are: time to set up the IJV (in days); cumulative uncertainty avoidance score; difference between uncertainty avoidance scores; value of the IJV in thousands of USD.

The mean of the cumulative uncertainty avoidance is 9,01, which is on average 4,51 per country. According to the Globe Project index this score is between medium (4) and relatively high (5). Since the sample used in this study covers many different countries around the world, a mean around the average score can be expected. The mean of the value of the IJV’s is 181.261.290 USD. Notable are the big differences between the minimum and maximum values of as well the values of the IJV’s as the days to set up the IJV’s. Consequently, its standard deviations are also relatively high. Nevertheless, since the data is not a normal distributed, outliers cannot be identified and removed. The output of the Normal probability plot for testing normal

distribution is placed in Figure 3. The average time to set up an IJV is 581,28 days (approximately 1,6 year). As mentioned before, this contains all the steps of setting up an IJV.

Table 2

Descriptive statistics

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Figure 3

Normal probability plot of ‘Time to set up an IJV’

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The B-value of the independent variable ‘uncertainty avoidance’ is 63,775 , which would mean that when the cumulative score of uncertainty avoidance increases with one, the time to set up an IJV will increase by 63,775 days. This seems plausible regarding the aim of this study, but the p-value is 0,155. This higher than the

significance level of 0,05 , which means that the possibility of no effect cannot be rejected. Hypothesis 1 is not supported. According to this test it cannot be argued that higher uncertainty avoidance leads to more time to set up an IJV. Notable is that the control variable has a B-value of -0,000076, when the expectation was that it would be positive. Since this would mean that when the value of the IJV increases with one unit (1000 USD), the time to set up the IJV decreases with 0,000076 days (around 6,5 seconds), it can be argued that is of very little influence.

Table 3

Linear regression H1

To test hypothesis 2 the value of the IJV is used as independent variable in a linear regression. The results can be found in Table 4. The R-square in this model is 0,01, which means that the value of the IJV can explain 1% of the variation in time to set up the IJV. This can be seen as quite low, since the results show that 99% is unexplained, or let for other influencing variables.

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means that the possibility of no effect cannot be rejected. Hypothesis 2 is not supported.

Table 4

Linear regression H2

4.2. Additional analyses

To test the statement in this study which argues that the cumulative uncertainty avoidance score would have more effect on the time to set up an IJV than the difference between the two scores, a linear regression is executed. A table with the results are placed in Table 5. In this linear regression with the dependent variable ‘time to set up an IJV’, the independent variable ‘difference between uncertainty avoidance’ and the control variable ‘value of the IJV’ the R-square of model 2 is 0.000. It shows that the combination of difference between uncertainty avoidance and the control variable (value of the IJV) account for 0% of the variation in the time to set up an IJV. The results show that the difference between uncertainty avoidance cannot explain any of the outcomes in time to set up an IJV. This means that it is unexplained, or left for other influencing variables.

The B-value of the independent variable ‘difference between uncertainty avoidance’ is -25,772, which would mean that when the difference between

uncertainty avoidance increases with one, the time to set up an IJV will decrease by 25,772 days. Nevertheless, no conclusion should be made from this score, because with a p-value of 0.68 this is highly insignificant at the 0,05 significance level.

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Table 5

Linear regression ‘difference between uncertainty avoidance’

The second additional analysis is conducted to test what the effect is of the value of the IJV as moderator between the relation of the (cumulative) uncertainty avoidance and the time to set up an IJV. The results are placed in the Table 6. The B-value of the moderator is slightly positive with 0,000041. This would mean that the value of the IJV, the stronger the relation between uncertainty avoidance and time to set up the IJV. Although this can be expected from the literature section, this is also highly insignificant with a p-value of 0,477.

Table 6

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5. Conclusions

5.1. Answering the research question

The purpose of this study was to get more insight into the process of setting up an IJV and how this is affected by risk. Therefore, the main research question was formulated: How does risk affect the process of setting up an IJV?

Former studies about IJVs were mainly focusing on managing an established IJV and its performance. Cultural distance was also studied in this area, but only regarding the performance of the IJV or entry mode choices. This study looked more into the source of the IJV instead of the consequences by researching the process of setting up an IJV.

To answer the research question uncertainty avoidance was chosen to measure risk, and the time to set up the IJV to measure the influence on the process of setting up this IJV. This study filled a research gap by taking a unique perspective in the international business literature; the focus was on the process of setting up an IJV in combination with the cultural dimension ‘uncertainty avoidance’. This dimension is relevant because IJVs are known as high-risk investments. How firms interpret these uncertainties could influence the process of setting up this IJV.

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argued a direct positive relation between the value of the IJV and the time to set up the IJV. To test these relations linear regression analyses were executed. Both hypotheses were not supported. The relation of the first hypothesis was positive, as expected, which would mean that a higher cumulative score on uncertainty avoidance will lead to more time to set up an IJV. Nevertheless, with a p-value 0f 0,155 it was not significant at the 0,05 significance level. Regarding to the R-square of 0,02, it showed that the combination of uncertainty avoidance and the control variable (value of the IJV) account for 2% of the variation in the time to set up an IJV. This means that 98% was unexplained, or left for other influencing variables. A conclusion

therefore could be that there are additional variables that have considerable influence on the time to set up an IJV. The relationship of the second hypothesis was slightly negative, which was not expected. This would mean that IJVs of higher value will lead to a (minimum) decrease in time to set up the IJV. Nevertheless, this hypothesis was also not significant. Another conclusion for the insignificance of the results could be the limitations of this study. Taking away some of those limitations could give other results. The next chapter looks into the limitations and gives suggestions for future research linked to them.

5.2. Academic implications

Despite the insignificance of the results, there are some academic implications. First of all, the research gap of studies about the process of setting up IJVs is partly filled. Since there are probably other variables affecting this process, this study can be seen as a base for future research on the process of setting up IJVs.

Secondly, the link between uncertainty avoidance in setting up IJVs and TCE is made. This is an additional view for TCE. Especially the costs of negotiation and the costs of preparing and writing contracts in the TCE can be linked to the steps

‘introduction and conditions’ and ‘writing the contract’ of setting up an IJV. Higher levels of behavioural uncertainty could affect the setting up of an IJV by for example getting to know each other, negotiations, and writing contracts. The higher the perceived uncertainties, the more partners want to exclude these. This can result in more time for the steps in setting up the IJV. In this view uncertainty avoidance is a factor to determine the transaction costs and could be applied to TCE. Firms from countries with high levels of uncertainty avoidance will exclude as much

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resources, but also trust will be limited. Knowing all uncertainties have to excluded by for example extensive contracts, trusting each other becomes less important. Nevertheless, trust is argued to be an important factor in the successfulness of an IJV (Inkpen & Beamish, 1997). Being aware of the level of uncertainty avoidance in the process of setting up the IJV could therefore contribute to the success of the IJV. One partner may choose to use other techniques to approach, communicate or negotiate, if he/she knows the other has a different level of uncertainty avoidance or other cultural dimensions.

Firms can consider this also in entry mode choices, where TCE is linked to.

Cultural dimensions affecting the transaction costs could be considered in choosing an entry mode. Although the results were not significant, this could be an interesting topic for future research. More suggestions for future research can be found in the next chapter ‘Limitations and future research’.

5.3. Managerial implications

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5.4. Summary

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6. Limitations and future research

As with any other study, this research is subject to a number of limitations which should be taken into account. The first limitation of this study is the use of cultural dimensions. The different models regarding cultural dimensions, including the Globe Project used in this study, assume that culture differs per country. This enables users of the models to distinguish countries, but these models do not include differences between members of societies. In sum, culture does not acknowledge country borders and national scores cannot be fully interpreted as deterministic for individuals. This could affect the reliability of the results. Primary data about the characteristics of the people in the sample could solve this limitation. Although, this takes much more time and is therefore not feasible for this study.

The second limitation is that this study did not account for differences between industries. This approach is chosen to capture an extensive variety of the variables. However, it is plausible to assume that this comes at the expense of the

generalizability of the results. There could be differences in either the time to set up an IJV as in the levels of risk avoidance between industries. In that view, this study only uses averages scores. Collecting data of different industries will show if there are differences between these industries and perhaps give more reliable results.

The third limitation is the focus on just one cultural dimension. To give a more complete image of the effects and thereby increasing the usefulness for managers all the dimensions can be measured. The insignificance of the results emphasizes this need. It is also possible that the different dimensions influence each other. This study however chose for uncertainty avoidance because the expectation was that this

dimension has most influence on the process of setting up an IJV. Since these scores of cultural dimensions are available, future research could use them for further research in the process of setting up IJVs.

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average time to set up the IJV used in this study significantly. Since this data is not available in the database Zephyr, future research could collect this manually. This brings along the fifth limitation. Inherent in research work, this study is mainly based on secondary data. This influences the measurement of the different variables. Although Zephyr is known as a reliable database, results are dependent of the exactness of the data about the dates of announcement and completion, and the value of the IJV. The same applies for the Globe Project data, although this is hard to measure yourself. Overall, collecting new primary data could increase the reliability of the study. As mentioned before, this could especially be the case with the different types of JVs.

The next and last limitation is related to all former limitations; the timeframe of this study. Since this a master thesis, there is a limited time to conduct research. Therefore, it is chosen to study for example limited variables and to use mainly secondary data.

Besides the findings and its implications this research opened up several

opportunities for future research, which were mentioned in the ‘Conclusions’ already. First of all, future research could try to find additional variables which are influencing the process of setting up an IJV. Since uncertainty avoidance has a limited

explanation on the variation of the time to set up an IJV, this study can be seen as a base for future research. Some of these additional factors are mentioned earlier in this chapter. A factor that is not mentioned yet is for example the experience of the manager in charge of setting up the IJV. One could imagine that a manager with more experience in setting up IJVs has a wider network and needs less time to set up the IJV. Another factor could be the size of the companies, next to the size of the IJV. It is reasonable to assume that larger firms can put more assets, supported by larger departments, into the process. This could save time and increase the chances of success.

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7. Acknowledgement

With the development of this thesis, I have taken the final step in finishing my MSc International Business & Management at the University of Groningen. Over the past six months, I have conducted a study on the relationship between risk and setting up IJVs; measured in the effect of uncertainty avoidance on the time to set up an IJV. In doing this, I have been supported by a number of people. First of all, I would like to thank my supervisor, Paulo Marques Morgado. During the development of my thesis, he provided me with excellent guidance, comments and feedback, with which I was able to continue and, more importantly, improve the report. Unless his busy schedule, he was always willing to meet and help.

Secondly, and most importantly, I would like to thank my parents for

supporting me over the past few years and especially during the development of my thesis. They made sure that I could fully spend my time on my study whenever I wanted, and they provided me with everything I needed to finish the MSc

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9. Appendix

9.1. Appendix 1: Interview Joost Berting

Vice president & managing director EMEA, Kennametal. - How does a company make the decision to set up an IJV?

There are several reasons for the decision to expand internationally. You can have a good product and therefore you are looking for a new market. You can use a

distributor, but if you have a complicated product and/or have a product that needs a lot of service, this may not work. With an IJV you can have more control, and also use the (local) knowledge of your partner, or have access to certain raw materials. There are a lot more reasons to set up a joint venture, but in most of these cases you are looking for complementarities/synergies.

- What are the steps in the process of setting up an IJV?

You can compare a Joint venture with a relation. The first step is to decide what kind of relation you want, and which strategy you will use. Do you want a relation in which your girlfriend does the cooking and the ironing of the clothes, or a relation in which you also can talk to each other. In a joint venture you have to decide what you want to achieve. You can for example only do exporting, or build a network abroad.

If the choice is made to set up an IJV, the next step is to select a partner. Here potential partners can come to you, or you can look for partners yourself. Most of the times it is better to look for partners, because then you can look for partners with your criteria. In this part of the process you sometimes need a consultant. In an industry where you know the competitors and potential partners and their

capabilities and reputation, a consultant is not necessary. In broader industries you can use consultancies to let them search partners of your criteria and who are compatible with your goals.

The third step is the introduction, or in the comparison with the relation the ‘first date’. In my opinion setting up a joint venture is strongly build on personal relations. If there is not a ‘click’ with the person or company, it often does not work. Therefore, culture is in this ‘people process’ very important, because you have to approach for example Russians differently than people from China. In this

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bring in, exit-clauses, etc. It is important to be very clear about your conditions from the beginning to avoid misunderstandings later on. So you start with writing down the conditions and begin with a memorandum of understanding, by describing how the relation could look like. This is a relative small document but it is important to it write down as good as possible, because points you forget will become negotiation points, which the other company will use. This process of building a relationship and writing down the conditions is not something you can do in a week, but easily a half year, a year, or longer, depending of the complexity of the deal.