The effect of country development on the ownership share of parent companies in international joint ventures.

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The effect of country development on the ownership share

of parent companies in international joint ventures.

By: Paul Nijmeijer

Master thesis: MSc in BA, specialization: Organization & Management Control University of Groningen

Faculty of Economics and Business Supervisor: Prof. dr. J. Van der Meer-Kooistra

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Abstract

This research provides insight into the effect of country development on ownership share as a mechanism of parent control of IJVs. While previous studies on parent control of IJVs are mainly focused on IJVs with parents from developed countries, this research takes parents from developed and developing countries into account as a classification of country development. In order to provide insight into the effect of country development on the distribution of ownership share in IJVs, multiple quantitative tests are conducted on 726 parents from developed and developing countries. Based on the uncertainty, asset specificity derived from the transaction costs economics, multiple differences are expected between parents from developed and developing countries which could influence the distribution of the ownership share in IJVs. The findings indicated that there is an overall equality in ownership share in IJVs established by parents from developed and developing countries, although this equality could be influenced by the size of the parents. Therefore, the advice to managers of future parents is to take their size and the size of the cooperating future parent into account when they want to establish IJVs and strive for a majority percentage of ownership.

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1. INTRODUCTION

From the eighties the number of international strategic alliances has increased (Kang & Sakai, 2000). This growing amount of international strategic alliances could be seen as an indicator of increasing globalization (Kang & Sakai, 2000). One popular and important governance structure for entering foreign markets is the Joint Venture (JV) (Aggarwal & Agmon 1990; Lopez-Perez & Rodriguez-Ariza, 2013;

Lowen & Pope, 2008; Purkayastha, 1993). If the JV is established in a foreign market, the JV is an International Joint Venture (IJV). IJVs are “legally independent entities formed by two or more parent companies from different countries that share equity investments and consequent returns” (Chen, Park & Newburry, 2009: 1133). To align IJV activities and performances with the objectives of the parent companies (parents), the parents use parent control (Geringer & Hebert, 1989; Groot & Merchant, 2000). Parent control is the influence exercised by parents over IJV operations (Geringer & Hebert, 1989; Schaan, 1983). The alignment of the IJV activities with the objectives of the parents by parent control is complex because the IJV is owned by multiple parents. Therefore parents do not only need to control the IJV activities, but also the relationship with the co-operating parents (Foster & Young, 1997; Shields, 1997). Because of the complex relationship between the parents and the IJV, it is interesting to know how parent control is executed in an IJV.

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The research question will be answered by conducting quantitative tests on 726 IJV parents from countries with a certain level of development. Therefore countries of the parents will be classified in terms of country development level. For the classification of country development level the terms developed and developing country will be used. Furthermore, this research will use IJVs established by two parents. The countries of the two parents, which are classified based on the level of development, lead to four combinations of IJVs established by parents from a developed or developing country. The first combination consists of parents which are both from developed countries. The second combination consists of a foreign parent from a developed country and a local parent from a developing country. The third combination consists of parents which are both from a developing country. And the fourth combination consists of a foreign parent from a developing country and a local parent from a developing country. For each possible combination a quantitative test will be conducted regarding the distribution of the ownership share.

By empirically testing the research question on a sample of 726 IJV parents from developed and developing countries related to the ownership share, this research contributes to previous studies by providing insight into the effects of the development of a country on ownership share as a mechanism of parent control used by parents in IJVs. By doing so it contributes to the research field regarding the previously mentioned dearth of research about parent control and IJVs established by foreign parents from developing countries and local parents from developed or developing countries. Furthermore, it contributes to the IJV research field due to the perspective used regarding foreign and local parent countries. Prior studies about IJVs are often limited to one perspective which is the perspective of local parents from one developed or developing host country of the IJVs, or to the perspective of foreign parents from one developed or developing country (e.g. Hennart, 1991; Pan, 1997; Pan & Li, 1998). The sample used in this research takes 726 IJV parents into account. The IJVs are established by local parents from multiple developed and developing hosting countries and established by foreign parents from multiple developed and developing countries. This perspective provides opportunities regarding the generalizability of the results.

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2. THEORETICAL BACKGROUND AND HYPOTHESES

In this chapter the hypotheses will be developed by using previous literature. First the theoretical background regarding IJVs and parent control will be explained. Second, the hypotheses and a conceptual model will be presented.

2.1. IJVs

The definition of IJVs explained that they are established by at least two parents. Parents can have a variety of objectives to establish IJVs such as: that full acquisition is too costly, share risks, to get access to resources a firm wants to acquire and IJVs could be used as a form of foreign direct investment (Hennart, 1991; Inkpen & Beamish, 1997). Parents may establish IJVs with similar and complementary objectives. Whereas one parent might want to obtain knowledge about local conditions of a country, the other might want to obtain resources from it (Beamish, 1985; Killing, 1983).

In addition to the fact that IJVs are established by two or more parents, the definition of IJVs highlighted that parents of IJVs need to be from two different countries. One difference between the countries could be the market economic development. The development status is based on GDP levels and other output statistics (Steensma & Lyles, 2000). To classify countries in terms of market economic development, the classification of developed and developing countries will be used (United Nations, 2013). The term of developed countries refers to the industrialized countries of North America, North and Western Europe, Japan and Australia. Developing countries refer to countries in Asia, Africa, Pacific, Latin America and the Caribbean (excluding Australia, Japan and New Zealand). This classification means that parents from IJVs could be from a developed or developing country.

2.2. Parent control

As previously explained, parent control is used by parents of the IJVs to reach their objectives (Geringer & Hebert, 1989; Groot & Merchant, 2000). In the following paragraphs an explanation for parent control will be given.

The Transaction Cost Economics (TCE) provided explanations for parent control in IJVs, which are the asset specificity, frequency of the transactions and uncertainty (Chen et al., 2009; Williamson, 1985, 1996). Because this research is about the general influence of the market economic development of a country related to the parent control used in IJVs, the uncertainty and asset specificity will be used and explained.

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parents (Kamminga & Van der Meer-Kooistra, 2007). Moreover parent control will be used to protect parents’ asset specific investments (Hamel, 1991). Both uncertainties and the asset specificity will be discussed in the subsequent paragraphs.

The behavior of a parent could lead to uncertainty. As previously explained, parents could have similar and complementary objectives to establish an IJV. In case of complementary objectives, the parents could try to steer the IJV to reach their objectives. If parents have complementary objectives to establish an IJV it could directly influence the survival or dissolution of the IJV (Steensma, Barden, Dhanaraj, Lyles & Tihanyi, 2008). Moreover, the goal congruence in an IJV in combination with the cultural difference could lead to an even higher level of uncertainty and influence the parent control in an IJV (Luo, Shenkar & Nyaw, 2001). Therefore the behavioral uncertainty requires an extra effort in terms of control.

Behavioral uncertainty has mainly to do with the uncertainty in the IJV while uncertainty outside the IJV has to deal with the environment of an IJV. Environmental causes of uncertainty can derive from unfamiliarity with the market, geographical distance, cultural differences, economic situation, political conditions and institutional conditions (Brown, Rugman & Verbeke, 1989; Burgers & Padgett, 2009; Fang & Zou, 2010). Differences in the external environment could influence the satisfactory performance of the IJV (Child & Faulkner, 1998; Geringer & Hebert, 1989; Mjoen & Tallman, 1997). Because the environmental uncertainty can lead to the survival and dissolution of the IJV, which has implications for the reached objectives of the parents, the parents want to have stronger parent control in case of environmental uncertainty.

The behavioral and environmental uncertainties are related, because the changes in the environment can lead to an increase in opportunistic behavior. Opportunistic behavior is behavior by a parent who sets self-interest at the expense of parents to achieve gains from it (Das & Rahman, 2010). According to Luo (2007) the risk of opportunistic behavior is positively influenced by the amount of structural instability, perceived information unverifiability and law unenforceability. To protect the IJV against the negative influences of opportunistic behavior, the parents want to remain in control in case of behavioral and environmental uncertainty.

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investments (Chalos & O’Çonnor, 2004). For this reason the expectation is that the parent who brings in most of the assets wants to acquire the most control over an IJV.

2.3. Parent control and the development of the market economy

The previous sections explained that the objectives of the parents can be similar or complementary, the parents can be from developed or developing countries and parent control can be influenced by uncertainty and asset specificity. In the subsequent paragraphs there will be an explanation for the expected usage of parent control in IJVs established by parents from developed or developing countries. Previous studies indicate some clear differences between the parents from developed and developing countries. The first difference, which distinguishes between parents from developing countries and parents from developed countries, is the resources endowment. Parents from developing countries tend to have weaker resource endowment than parents from developed countries (Hitt, Dacin, Levitas, Arregle & Borza, 2000). This is caused by the youngness of the parents from developing countries and the privatization of former government owned parents (De Castro & Uhlenbruck, 1997). For this reason the resource endowment of parents from developing countries is expected to be weaker than the parents from developing countries (Hitt et al., 2000). An example of weaker resource endowment is technological resources (Hitt et al., 2000). Parents from developed countries usually have a competitive advantage due to the fact that they have more technological resources (Bae, Ju, Kim & Kwon, 2012). Therefore the endowment of technical resources by parents from developed countries is expected to be higher. The expectation is that the parent who brings in more resources wants to acquire stronger control to protect their investments (Mjoen & Tallman, 1997). For this reason it is expected that if IJVs are established by parents from developing and developed countries, the parents from the developed countries acquire stronger control.

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objectives are more similar and therefore the control will be less complicated. This also means that if the selection criteria are different the strategic objectives of the companies are complementary and therefore the control will be more difficult. Considering this expectation and the knowledge about the difference in the selection criteria of companies from developed and developing countries, the expectation is that parent control will be easier when there are two parents from developed or developing countries establishing an IJV.

Finally, the environment of developed and developing countries differs. Examples of differences in these environments are the economic infrastructure, political and institutional conditions. The economic infrastructure is usually less developed in a developing country than in a developed country (Hitt et al., 2000). The political situation in developed countries is in general more stable compared to that in developing countries and the institutional environment is more developed in developed countries. These three influences increase the likelihood of collaboration hazards and instability for IJVs established in developing countries, which might have negative outcomes regarding the stability and success of the IJVs (Burgers & Padgett, 2009; Fang & Zou, 2010; Gulati, 1995; Yan, 1998). The unfamiliarity with the unstable economy, politics and institutions in developing countries mean that foreign parents want to obtain more control when an IJV is established in a developing country.

Another difference in the environment which enhances the uncertainty is the cultural differences between developed and developing countries. The culture between two developed countries is most likely to be quiet similar (Hyder, 1999). But the difference between developed and developing countries could enhance the environmental uncertainty and increases the risk of opportunistic behavior (Das & Rahman, 2010).

These differences indicate that in general parents from developed and developing countries show notable difference in the resource endowment, selection criteria and environment. So when an IJV is established, parents need to deal with these differences that could influence parent control.

2.4. Ownership share

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party (Grossman & Hart, 1986; Milgrom & Roberts, 1992). Considering the accessibility to a large amount of data regarding the ownership share of IJVs, this mechanism of parent control is used.

Ownership share enables the parent to affect another mechanism of parent control which is the membership of the IJV board of directors. By having the majority in the board of directors the direction of the organization can be controlled. The control will be enhanced through the board of directors because they are responsible for making decisions over production, business plans and appointing top management teams (Yan & Gray, 1994). With the acknowledgement that most IJVs have a board of directors (Jaussaud & Schaaper, 2006) and the influence of the ownership share on the board of directors, the ownership share could enhance parent control (Filatoteleve & Wright, 2011). This indicates that the IJV ownership share is a form of equity control but also gives the ability to influence the board of directors which is a form of non-equity control.

A downside of the increasing parent control is that it negatively affects the success and longevity of an IJV (Yan & Gray, 2001). For this reason the proportion of ownership share is a point of discussion by researchers. Some have proven that a dominant foreign ownership will reduce the risk of opportunism from the local partner (Blodgett, 1992; Killing, 1983). But others show a preference for equal ownership (Beamish, 1985; Steensma & Lyles, 2000). The reason for equality between the parents would be the mutual forbearance necessary for IJV stability. In one extensive study, Moskalev and Swensen (2007) confirmed the latter preference for equal ownership regarding the distribution of ownership share.

While there is equal ownership in IJVs established by two parents from developed countries, a preference exists for an unequal ownership share in case of a foreign parent from a developed country and a local parent from a developing country (Beamish, 1985). This finding is supported by researchers who indicated that a higher ownership share is common in case of a presence of more risk and higher firm specific assets (Yan & Gray, 2001). As previously explained, there is in general more risk when a parent is operating with another parent from a developing economy, due to the asset specificity of resource endowment and the environmental uncertainty.

2.5. Hypotheses

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Derived from the theoretical background, the conceptual model is developed. The control variables presented in the conceptual model will be explained in the next chapter.

TABLE 1

Different parent combinations for an IJV

; Foreign parents from developed countries

For IJVs established by parents from developed countries, the expectation is that both parents will have an equal amount of ownership share over the IJVs. There are multiple reasons for this assumption.

The first reason is the culture of the parents from developed countries. The cultures between the parents are relatively similar because they both are from a developed country (Hyder, 1999). Due to cultural similarities, the environmental uncertainty is low and the risk of opportunistic behavior will be lower.

The second reason is the environment of the host country. There is a relatively certainty in the environment of an IJV established in a developed country due to a stable economy and political situation (Burgers & Padgett, 2009; Fang & Zou, 2010; Gulati, 1995). Therefore the risk of opportunistic behavior by the parents is relatively low.

The third reason is considering the resource endowment of the parents. Both parents tend to have the same amount of resource endowment, because they do not have an inequality in knowledge which could lead to a competitive advantage. Both parents want to remain in control over the resources, therefore an equal distribution of ownership share is expected.

Due to cultural similarities, the relatively stable environment and the resource endowment, the expectation is that the parents will have an equal ownership share.

Hypothesis 1: If an IJV is established by a foreign parent from a developed country and a local parent from a developed country it is likely that each parent strives for a 50 percent ownership share.

On the other hand, the ownership share will most likely be unequal if there are two parents from developed and developing countries. In IJVs established by local parents from developing countries and

Foreign Parent Local Parent 1 Developed country Developed country 2 Developed country Developing country 3 Developing country Developing country 4 Developing country Developed country

Position of parents in an IJV Parent

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foreign parents from developed countries, the expectation is that the foreign parents want to acquire a majority ownership share.

From the perspective of the foreign parent there is more risk of opportunistic behavior when it operates with a local parent from a developing country, because of the political instability, economic structure and the uncertain institutional environment of the host country (Burgers & Padgett, 2009; Fang & Zou, 2010; Gulati, 1995). Moreover, the cultural diversity between parents from developed and developing countries enhances the risk of opportunistic behavior (Das & Rahman, 2010).

Because parents from developed countries tend to have more resources endowment in an IJV than to parents from developing countries, they strive for protection of their assets against opportunistic behavior. To protect their assets they use parent control. Therefore the expectation is that the foreign parent company would increase its ownership share leading to more parent control.

Hypothesis 2: If an IJV is established by a foreign parent from a developed country and a local parent from a developing country it is most likely that the foreign parent strives for a majority ownership share.

Foreign parents from developing countries

The previous two hypotheses contained IJVs established by foreign parents from developed countries. Apart from IJVs established by foreign parents from developed countries, there are also IJVs established by foreign parents from developing countries. For this reason there are two hypotheses developed, each with a foreign parent from a developing country. The foreign parent could establish an IJV with parents from developing countries or with parents from developed countries. The two possible combinations will be explained subsequently.

In IJVs established by foreign and local parents from developing countries, the assumption is that the foreign parents want to have strong control and therefore will have a majority ownership share. This has mainly to do with the uncertainty in the environment. The perceived environmental uncertainty of IJVs established in developing countries would be relatively high due to the political, economic and institutional instability (Burgers & Padgett, 2009; Fang & Zou, 2010; Gulati, 1995; Yan, 1998). The local parents perceive less uncertainty in this case compared to the foreign parents, because the former has familiarity of the hosting country. For this reason the expectation is that the foreign parents want to have more control over an IJV established in a developing country.

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In an IJV established by a foreign parent from a developing country and a local parent from a developed country, the assumption is that the local parent will have majority of the ownership share. There are multiple reasons for this assumption. First, the host country is developed therefore the political, economic and institutional environment will be stable (Burgers & Padgett, 2009; Fang & Zou, 2010; Gulati, 1995), and does not affect the risk of opportunistic behavior. But the cultural diversity between developed and developing countries does increase the risk of opportunistic behavior (Das & Rahman, 2010). This could be an indicator that one of the parents wants to acquire a strong parent control.

Second, there is a lack of competitive advantage in the sense that the technological level of parents from developing countries compared with parents from developed countries. Parents from developed countries have this competitive advantage because they tend to have more technological resources (Bae et al., 2012). Parents from developing countries are for this reason more likely to have a minority ownership share if they cooperate with parents from developed countries (Bae et al., 2012).

Third, in general the parents from developed countries tend to have more resources endowment in IJVs (De Castro & Uhlenbruck, 1997; Hitt et al., 2000; Yan & Gray, 1994). Therefore they want to protect their resources by using parent control.

Due to the cultural differences, and the resource endowment the expectation is that there is majority ownership from the local parent.

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FIGURE 1 Conceptual model

3. METHODOLOGY

This chapter describes the data collection and the formation of the sample. Sequentially, the measurement of the independent, dependent and control variables will be explained. Finally, the study methods will be addressed.

3.1. Data collection

To test the hypotheses, quantitative tests were used. To form a sample for the quantitative tests data were obtained from Securities Data Companies (SDC) Platinum, complemented with data from Orbis. Both databases contain secondary data.

The SDC Platinum database is created by Thompson Financial and contains an extensive amount of data about IJVs. The database contains over 200 data records, examples of these are the industries of the IJVs, the parents of the IJVs and the nationalities of the parents. The database is often used by researchers, but contains multiple drawbacks. Examples of drawbacks of the database are the sparse data prior to 1990, possible biases to English language sources and some elements of the data have

Developed country – Developing country

Developing country – Developing country

Developing country – Developed country

Control variables:



IJV experience



Industry



R&D flag



Parent size

Developed country – Developed country Both parents 50 % ownership share

Majority ownership share by foreign parent

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missing values (Schilling, 2009). Although the SDC Platinum database contains multiple drawbacks, the assumption was that there was no better database available, due to the extensive amount of data available and because many researches used the SDC Platinum database (Schilling, 2009). Therefore the SDC Platinum database is used in this research.

The data obtained from the SDC Platinum database are complemented with data from the Orbis database. The Orbis database is owned by Bureau van Dijk and contains records beyond 10 million companies. Examples of records in the Orbis database are the financial records such as the current assets, cash flows and the profit margins and organizational records such as the primary SIC codes, board members and number of employees.

3.2. Sample formation

For the formation of the sample, the data must meet multiple requirements. First, the data needed to contain IJVs established during a time span of 2005 until 2010. The time span is chosen to provide validated and reliable results which are applicable at this time. In this time span 10602 parents established an IJV.

Second, the IJVs needed to be owned by the parents for at least a certain percentage to be classified as IJVs (Gomes-Casseres, 1989; Hennart, 1991; Selekler-Göksen & Uysal-Tezölmez, 2007). Some authors argue that the ownership share needs to be at least 5 percent to a maximum of 95 percent (Dhanarai & Beamish, 2004; Gomes-Casseres, 1989; Hennart, 1991; Li, Zhou & Zajac, 2009; Selekler-Göksen & Uysal-Tezölmez, 2007), other authors argue that it needs to be up to a minimum of 10 to a maximum of 90 percent (Hladik, 1985; Tatoglu & Glaister, 1998). The most common and overall accepted percentage used is the 5 and 95 percentage (Beamish & Jung, 2005). Therefore this paper took this requirement into account for defining IJVs. By applying this requirement, the comparability of this research with other studies increases. In total the requirement did not hold for 40 IJVs.

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variable IJV experience of the parents. The IJV experience of the parents could be with an undisclosed partner as well.

The last requirement was regarding the amount of parents of the IJVs. The focus in the 2010 sample was on the IJVs established by two parents, which brings the sample to 363 IJVs established by 726 parents. IJVs established by two parents are used because of the complexity of the research when an IJV is established by more than two parents. Moreover, various authors suggest to start with IJVs established by two parents (Beamish & Kachra, 2004; Sim & Ali, 2001).

3.3. Measurements

For this research the ownership share is used as a dependent variable. The independent variables are the development of a parent country and whether the parent in an IJV is a foreign or a local parent. Furthermore, to control the results, four control variables are included. The control variables included in this research are: IJV experience of the parents, R&D flag, the industry of the parents and the size of the parents. Table 2 gives an overview of the variables used, how they are measured, and the data sources.

Dependent variable.

Ownership share – Ownership share can influence the parent control in an organization (Luo et al., 2001). For this reason ownership share is used as a measurement of parent control. Ownership share is measured by the ratio of ownership of the IJV by each parent. Information about ownership share is obtained from the SDC Platinum database.

Independent variables.

Development of a country – The country development is a variable that classifies countries as developed or developing. This classification is commonly used in previous research (Hyder, 1999; Sim & Ali, 1998; Tong, Reuer & Peng, 2008) and defined by the United Nations (2013). The developing countries are indicated with “zero” and developed countries are indicated with “one”. Information about ownership share is obtained from the SDC Platinum database.

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IJV experience – The first control variable is the IJV experience of the parents. IJV experience could influence the knowledge about establishing an IJV with another parent with a different culture. This experience could be applicable during the establishment of new IJVs. Due to previous experience there is less uncertainty compared to parents with no previous experience in establishing an IJV (Porporato, 2012). Due to the acknowledgement derived from TCE that uncertainty could influence the parent control, the IJV experience of an individual parent is included as a control variable. The proxy to measure prior IJV experience used is the total number of IJVs established during the past 5 years (Chen et al., 2009; Klijn, 2013; Park & Ungson, 1997; Sim & Ali, 2001). In this study the proxy is taken from the time span of 2004 – 2009.

R&D flag – The second control variable is the R&D flag. If the parents aim to establish an IJV for R&D purposes this could have an effect on the parent control due to the asset specific investments and more intellectual knowledge involved in an R&D IJV (Gulati, 1995), which could be seen as an indication of asset specificity (Lu & Hébert, 2005; Hennart, 1991). For this reason the parents will use control mechanisms to protect their specific investments in an IJV. Because both parents provide resources for the R&D, they both want to remain in control. Data about the R&D flag are derived from the SDC Platinum database. If there was no R&D flag in the IJV this was classified as “zero” if there was an R&D flag is was classified as “one”.

Industry – The third control variable is the industry. The specific industry could have an effect on the parent control in an IJV. For example, Franko (1989) indicated a difference in the distribution of that ownership share between industries. In the nonferrous metals industry 80 percent of the IJVs is equally owned, while this is just 24 percent in the food industry. For this reason the industry of the parents is included as control variable by using the standard operationalization of two-digit SIC codes, derived from the SDC Platinum database(Chen, Hu & Hu, 2002; Delios & Beamish, 1999; Gomes-Casseres, 1989; United Nations, 2014).

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TABLE 2

Description, measurements and data source of the variables

Variables Description Measurement Source

Independent Developing country= 0; Developed country= 1. Local parent= 0; Foreign parent = 1. Dependent Ownership share

For an IJV, this control is manifested by the percentage of capital that each partner invests in the venture. This is also known as ownership control. Ownership control refers to the residual rights to making decisions regarding an asset’s use that is not contractually given to another party.

The ratio of ownership by each parent

SDC Platinum

Control Parent IJV experience

The number of international joint ventures and operated by the parent firms.

The sum of IJV formed and by the parent firms, the last 5 years.

SDC Platinum

No R&D = 0; R&D = 1.

Industry The industry the IJV is operating in. Using a 2 digit SIC code SDC Platinum Parent firm

size

The size of the parent firm. Measurement of the amount of employees of the parent company

SDC Platinum, Orbis

SDC Platinum In the IJV there are R&D activities.

R&D flag

The term developed countries refers to the industrialized countries of North America, North and Western Europe, Japan and Australia. Developing countries refer to countries of Asia, Africa, Pacific and Latin America and the Caribbean (Excluding Australia, Japan and New Zealand). Development of a country SDC Platinum, United Nations (2013) Position in an IJV

A local parent has the same origin as the IJV host country of the IJV, a foreign parent has a different origin as the host country of the IJV.

SDC Platinum

3.4. Study methods

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allows an One-way ANOVA test. To test the hypotheses four subsamples were used to test each hypothesis, because the hypotheses described four different parent country combinations described in Table 1 in which the ownership could differ. The subsamples for testing each hypothesis and the number of parents included in each sample are presented in Table 3.

TABLE 3

Frequency and representation of the relationships and sample size

Foreign Parent Local Parent

1 Developed country Developed country 152 20,9 20,9

2 Developed country Developing country 336 46,3 67,2

3 Developing country Developing country 162 22,3 89,5

4 Developing country Developed country 76 10,5 100

726 100

Cumulative Percent Position of a parent company in an IJV

Subsample

Total

Frequency Percent

In case of a significant test result the control variables (IJV experience, R&D flag, industry and parent firm size) were used to test if they had any influence on the significance of the test. Therefore ANCOVA tests were conducted to test the covariance effect of these control variables. The requirement for these tests was that the test result also needed to be significant in the ANCOVA tests. If the requirement holds, the results were tested with the control variables. The tests were conducted separately to indicate whether they had an influence on the significance of the test.

4. RESULTS

The results present the descriptive statistics of the variables, the statistical results for the hypotheses and covariance effect of the control variables.

4.1. Descriptive statistics

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TABLE 4

Descriptive statistics and correlation matrix

Mea n s td dev. 1 2 3 4 5 6

1 Devel opment of a country 0,49 0,50

2 Pos i ti on i n a n IJV 0,50 0,50 0,358**

3 IJV Experi ence 1,30 2,83 -0,001 0,072

4 R&D fl a g 0,04 0,19 0,062 0,000 -0,018 5 Indus try 41,30 21,79 -0,053 -0,022 -0,123** -0,008 6 Pa rent fi rm s i zeb 34945,61 69366,84 0,093 0,127** 0,335** -0,066 -0,035 7 Owners hi p s ha re 50,00 8,77 0,002 0,057 0,061 0,000 -0,018 0,027 ** p < 0.01 level (2-tailed). Va ri a bl esa a n = 726, b n = 409

4.2. Test results

The ownership share was tested for normality by using the Shapiro-Wilk test; this test indicated that the general sample and the subsamples are normal distribution with a 0,000 significance. Furthermore, an outlier test indicated that ownership share in the subsamples did not contain outliers. For this reason the four hypotheses are tested by performing an One-way ANOVA test.

In order to test if one of the four combinations of parent countries, which are described in the hypotheses, have an influence on the distribution of ownership share the One-way ANOVA test is conducted for every hypothesis. The tests are taking the development of the parent countries and the positions of the parents in an IJV into account and relate them with ownership share. The results of the tests are presented in Table 5.

Hypothesis 1.

The result of the first test does support the first hypothesis. There is no significant difference in ownership share in IJVs established by parents from developed countries. The One-way ANOVA test was not significant, F(1, 150) = 0,768, p = 0,382.

Hypothesis 2.

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The result of the third test does not support the third hypothesis. There is no significant difference in ownership share in IJVs established by parents from developing countries. The One-way ANOVA test was not significant, F(1, 160) = 0,003, p = 0,957.

Hypothesis 4.

The results of the fourth test provided a significant difference of ownership share in IJVs established by foreign parents from developing countries and local parents from developed countries. This was tested by using an One-way ANOVA test, F(1, 74) = 5,734, p = 0,019. The test was significant with a mean of 48.16 for the local parent and 51.84 for the foreign parent respectively.

Because the fourth test was significant, the control variables were included in an ANCOVA with univariate test to test if the control variables had any effect on the statistical significance of the fourth test. The ANCOVA test showed the same significance level as in the ANOVA test. Therefore the control variables (IJV experience, R&D flag, industry and parent firm size) were included as covariance variable in the ANCOVA test.

The tests provided the insight that three control variables (IJV experience, R&D flag and industry) changed the significance level of the test compared to the original test (0,019), but they did not change the actual significant result of the test. Therefore the test still showed a significant difference in ownership share between local parents from developed countries and foreign parents from developing countries. The results of the covariance effect of the three variables on the fourth test will be briefly explained. The covariance effect with the control variable IJV experience in the ANCOVA test did not change the significant result of the fourth test, F(1, 76) = 4,962, p = 0,029. The covariance effect with the control variable R&D flag in the identical test provided also significant effect of the fourth test, F(1, 76) = 5,656, p = 0,020. And for the covariance effect of the third control variable industry F(1, 76) = 5,673, p = 0,020 holds the same reasoning as for the control variables of IJV experience and R&D flag.

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TABLE 5

ANOVA results of the Hypotheses tests and ANCOVA results of the control test

Hypothes i s H1 H2 H3 H4

Sa mpl e L DD - F DD L DG - F DD L DG - F DG L DD - F DG

N = 152 336 162 76

Sum of s qua res 39,821 71,319 0,284 257,158

Df 1 1 1 1

F -Va l ue 0,768 0,833 0,003 5,734*

Control va ri a bl es : F -Va l ue F -Va l ue F -Va l ue F -Va l ue IJV Experi ence - - - 4,962*

R&D Fl a g - - - 5,656*

Indus try - - - 5,673*

IJV Pa rent s i ze - - - 0,878

* p < 0,05 l evel

L = Loca l , F = Forei gn, DD = Pa rent from a devel oped country, DG = Pa rent from a Devel opi ng country

5. DISCUSSION

In order to get insight into the effect of the development of countries on the ownership share in IJVs, multiple tests are conducted regarding the distribution of ownership share in IJVs established by parents from developing and developed countries. By doing so, the question whether the development of the parents’ country influences the ownership share of the parents in IJVs will be answered.

Previous studies argued that parent control is influenced by environmental uncertainty, behavioral uncertainty and asset specificity. Derived from these studies hypotheses regarding the effect of the development of countries on the ownership share were developed and tested for significance. This chapter will discuss the results of the tests and will explain the managerial and theoretical implications of the results.

5.1. Country development and ownership share

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influence the asset specificity and the behavioral uncertainty. Based on these differences related to the environmental uncertainty, behavioral uncertainty and the asset specificity, hypotheses were developed regarding the effect of country development on ownership share as parent control mechanism in IJVs.

The results of the hypotheses show that in general there is no significant different distribution of ownership share in IJVs established by parents from developed and developing countries. Therefore the finding of this research is that that the development of a country does not lead to an unequal distribution of ownership share. This finding is consistent with the finding of previous research. Moskalev and Swensen (2007) found that many parents establish an IJV with an equal distribution of ownership share. This finding also confirms the hypothesis which expected that IJVs established by parents from developed countries have a 50 percent ownership share and rejected the other hypotheses which predicted an unequal distribution of ownership share in IJVs established by parents from developed and developing countries and in IJVs established by parents from developing countries.

One reason for a difference between the expectations and the results could be the choice of the parent control mechanism. The focus of this research was on ownership share as parent control mechanism, because the database did not provide information about other parent control mechanisms, while the studies which formed the basis for the expectations are regarding the parent control in general. The difference between the parent control and parent control mechanism is that parent control can be achieved by using multiple parent control mechanisms which means that one parent control mechanism is just a part of the parent control (Geringer & Hebert, 1989). This means the results of the hypotheses could be somewhat biased, because these hypotheses are not based on the parent control mechanism ownership share, but on the parent control in general.

Another reason for the difference in the results compared to the expectations could be the timing of the measurement of ownership share. The records of ownership share used in this research were measured at the establishment of the IJVs, while the ownership share percentages can change over time (Inkpen & Currall, 2004). Measurements of ownership share at another time could provide different results regarding the distribution of ownership share (Inkpen & Currall, 2004).

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One influence on the distribution of ownership share is the bargaining power of the parents. An example of the usage of bargaining power is given in the fourth hypothesis. The fourth hypothesis focused on the ownership share in IJVs established by local parents from developed countries and foreign parents from developing countries. The test showed a strong support for differences in ownership share of the parents which was consistent with the expectation. However, the direction of this relation was somewhat surprising. The expectation was that the local parent from a developed country would have a majority ownership share, while the results indicate that the foreign parent from a developing country has a majority ownership share. After controlling for the parent size as an indicator of bargaining power, the results did not indicate a significant difference in ownership share anymore. The reason for the change in the level of significance could be that larger parents use their bargaining power to demand a majority of ownership shares (Pan & Li, 1998). This is an important insight for this study, because it shows that the bargaining power could influence the distribution of ownership share. It also means that parents could strive for a majority ownership share, but they need to have the bargaining power to actually acquire a majority ownership share over IJVs (Mjoen & Tallman, 1997). The bargaining power of the parents could therefore be an explanation for an overall equal distribution of ownership share when IJVs are established by parents from developed and developing countries. Although some parents might strive for a majority ownership share, they might not have the bargaining power to actually acquire the preferred ownership share percentage (Mjoen & Tallman, 1997).

Another influence on the distribution of the ownership share could be the regulations of the local government. Most governments in developing countries prefer a more dominant position of the local parent (Lee & Beamish, 1995). Regulations regarding the tax advantages for foreign parents with minority ownership shares are influencing the distribution of ownership share (Lee & Beamish, 1995). This means that the governmental regulations could influence the distribution of ownership share. However the lower the ownership share of the foreign parent, the more risk perception there is by the foreign parent regarding opportunistic behavior (Hsieh, Rodrigues, & Child, 2010). Therefore the governmental regulations may lead to an equal distribution of ownership share, because the regulations promote a more dominant position of the local parent while the foreign parent wants to remain in control to protect itself against the risk of opportunistic behavior.

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on the other and feels less threatened by possible exploitation, resulting in the longevity of the IJV. So an IJV might be established with an equal distribution of ownership share to create an environment of respect, trust, stability, knowledge transfer and symmetric cooperation.

5.2. Managerial and theoretical implications

This study provides a descriptive representation of ownership share in IJVs established by parents from developed and developing countries. The results show that there is no significant different distribution of ownership share when two parents from developed and developing countries establish IJVs. If there is a difference in ownership share this is most likely due to the chance, but not due to the difference in developments of the countries. This means that the level of country development does not lead to an unequal ownership share by parents from the IJVs. This could have to do with the bargaining power of the parents, government regulations and with the fact that an equal distribution of power which cultivates an environment of respect, trust, symmetric cooperation and stability (Steensma & Lyles, 2000; Yan & Gray, 2001).

However, a significant difference in ownership share in IJVs could be caused by the size of the parents. For this reason research on parent control and IJVs needs to take the size of the parents into account, because the size of the parents could influence the parent control in IJVs by using the parent’s bargaining power.

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6. CONCLUSION

To give an answer to the research question ‘what is the effect of country development on the ownership share of parent companies in IJVs’ multiple quantitative tests have been conducted. By doing so this research provides insight into the usage of parent control in IJVs established by parents from both developed and developing countries. The tests show that in general there is no significant different distribution of ownership share when IJVs are established by parents from developed and developing countries. The tests also show that the size of parents, which could be related to the bargaining power of the parents, could have an influence on the distribution of ownership share in IJVs. So in general, the development of a country does not lead to an unequal distribution of ownership share in IJVs. If there is an unequal distribution of ownership share, this is most likely caused by other factors such as the bargaining power of the parents.

6.1. Research limitations and future research

This study contains a few limitations. The first limitation is regarding the measurement of the control variable of size of parents. There are various measurement possibilities of parent size, such as: the amount of assets owned by parents, annual sales of the parents and amount of employees in the parents firm (Lowen & Pope, 2008; Sim & Ali, 1998). The choice of the measurement of parent size could influence the results of the tests (Lowen & Pope, 2008). Therefore, it would be interesting to know whether the different measurements could have an influence on the significance level of the different relationships.

The second limitation is regarding the theoretical background. Although previous studies provided extensive results regarding parent control and IJVs, these studies were mainly from the perspective of foreign parents from developed countries (Caglio & Ditillo, 2008; Hamel, 1991; Oxley, 1999). Research taking the perspective of foreign parents from developing countries into account is relatively scarce (Lee & Beamish, 1995; Luo, 1998; Sim & Ali, 2001; Taullman & Shenkar, 1990). For this reason, it is hard to create well-supported hypotheses regarding parent control in IJVs established by foreign parents from developing countries. Therefore, more case studies are required about parent control in IJVs established by foreign parents from developing counties. This recommendation for future research enhances the possibility for a comprehensive view of parent control and ownership share preferences in the different contextual situations in which IJVs are established.

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respect to the number of parent control mechanisms and has limitations regarding the multidimensional perspective of the parent control mechanisms (Delios & Björkman, 2000; Jaussaud & Schaaper, 2006; Lee et al., 1998). The multidimensional perspective of parent control mechanisms refers to the dimensions which comprise IJV control: the focus of control, the extent of control achieved by the parents and control mechanisms the parents use (Geringer & Hebert, 1989). Although this study provides a realistic insight in one parent control mechanism, the ownership share, multiple control mechanisms could be used by the parents with a focus on different activities resulting in a certain degree of control. Therefore the suggestion for future research is to perform case studies regarding parent control mechanisms in IJVs, as it provides the opportunity to: include other parent control mechanisms, get knowledge about the focus of these mechanisms and get insight in the extent of control achieved by using these mechanisms. This provides the possibility for getting an insight in the multidimensional perspective of the parent control mechanisms. As mentioned above, these case studies are in particular recommended for IJVs established by foreign parents from developing countries.

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