International Joint Ventures performance: The influence of a Strategic ownership control on the duration of International Joint Ventures.

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Student number: Faculty:

S3226158 Faculty of Business and Economics

University of Groningen Groningen, the Netherlands Name: 

Manuel João Serra Dias Agapito Fernandes

Februar y 2018

Master’s Thesis International Business & Management

Supervi sor 

dr. M aurice Ridder de van der S chueren Co-assess or

dr. D.H.M. Akkerm ans

Research Project

International Joint Ventures performance:

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Abstract

International Joint Ventures (IJVs) as a form of cooperative strategy are long defined as one of the most engaging forms of undertaking businesses when partnering with external firms. However, many authors identified them as a form of alliance that often fail within the first years after their incorporation. Therefore, one of the purposes of this study is to analyze if the ownership structure of strategic control by the majority parent company is a critical feature that can explain the sustainability and the success of the IJV.

For this purpose, we collected and analyzed a sample of 81 IJVs, formed by two parent companies, from all over the world in the time period from 2006 to 2016. Through empirical analyses, we statistically test our model in order to answer our research question: Considering the International Joint Ventures majority partner strategic level of control, does the previous FDI experience of both partners imply that the duration of the alliance is longer lasting?

Moreover, using former international experience through FDI as a moderator in our model we discuss how past experience on overseas alliances can influence the durability of joint ventures. More specifically, we argue that the relationship between the majority partner strategic level of control and former FDI experience can lead to a higher duration of IJVs. Although we did not find strong support for our theory, we did observe significant results for the variables FDI experience and IJV size concerning the durability of joint ventures.

We expect our findings lead to future research to continually investigate IJV performances and their success factors.

Fi eld Ke ywords:  

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1. Introduction

The perception of how wide-spread globalization is incentivizing companies to adopt new and innovative ways of performing their own activities. In order to achieve their goals, companies are increasingly collaborating with each other making cooperative strategies a trend in global markets (Russo & Cesarani, 2017). Allying with a strategic partner is seen as an optimal response to environmental changes such as increasing competition, an extension of required investment, and globalization of markets (Yasuda, 2005). Partnering offers many benefits and helps creating value as it enables companies not only to share resources and knowledge, to gain access to local assets, to new network distributions and connections but also to enter new markets (Barringer & Harrison, 2000). A good example of this cooperation is strategic alliances.

Strategic alliances are interfirm cooperative agreements aimed to achieve competitive advantage and sources of growth for the partners (Das & Teng 1999). They are seen as workaround mechanisms to markets where resource exchange and value of accessed resources are central concerns. Every year more and more firms are joining in strategic alliances, despite of the fact that it is still significant the number of alliances dissolved in the short-term. In fact, studies show that the number of corporate alliances increases by 25% a year and that those alliances account for nearly a third of many companies’ revenues and value. Yet, the failure rate for alliances hovers between 60% and 70% (Hughes & Weiss, 2007).

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6 based on academic curiosity and interest but also due to its contemporaneity (see Appendix B, C and D).

Similar to Barringer & Harrison's 2000 findings, but at an international level, Yan & Luo, 2016, state that firms also prefer IJVs to gain faster entry into a new market, to acquire expertise, to increase production scale or even to expand business development by enlarging access to new distributor networks. Additionally, the latter authors add that IJVs allow an increase in production scale.

Many studies had already reported that the majority of IJVs fail in the first years after its incorporation. This reality is mainly due to the large gap between the potential for mutual benefit and their actual track record. Additionally, IJVs tend to be highly unstable. Here, Park & Ungson 1997 found that differences in cultures add misunderstandings that, consequently, can lead to an IJV failure. Moreover, tensions between parent firms might also cause instability and, thus, the failure of joint ventures in general (Kogut, 1989). Other studies concluded similar results that combine the conclusions of these two and at the specific level of joint venture parents. An example is the Pothukuchi et al., 2002 where the authors applied the Hofstede cultural dimensions and found that culture has not only a major impact in causing IJV failure but it can also create unsatisfied performance.

One of the purposes of this study is to analyze the ownership structure of control by the majority parent company as a critical feature that can determine the sustainability and the success of the IJV. Therefore, upon the tensions between cooperation and competition, rigidity and flexibility and short-term oriented goals versus long-term oriented goals that are not stable (Das & Teng 1999).

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7 companies involved become interdependent. This fact implies, again, the relevant impact of the control level between them and consequently the way they must collaborate to achieve common aims.

To understand the relationship between the level of control and IJVs, and if they lead and influence negatively or positively the duration of the alliance, a new variable must be integrated as well. How effective can a parent firm make use of its pasts joint venturing experiences? To answer this question is imperative to understand primarily the role of previous international contact such as Foreign Direct Investment (FDI). On one hand, through former FDI experience we expect to understand whether prior experience change or not the relationship above mentioned. On the other hand, MNEs will actively transfer management knowledge to their partner firm. Tsang (2002) states that sharing and transferring this experience is essential for raising the lessons learned from overseas ventures from an individual to an organizational level. According to Cohen & Levinthal, 1989 the effect of FDI experience suggests that savvy MNEs are more able, to store and embed lessons learned from their overseas ventures in the organization when compared with their former competitors. This indicates the existence of learning-by-doing, referring to the process by which the firm becomes more practiced and, hence, more efficient at doing is business activities.

Prior studies about IJVs have essentially focused on the performance of established IJVs or on factors that were able to influence the choice of the entry mode. In addition to those, there were still other studies that used another method focused on the instability involved in IJV (Inkpen & Beamish, 1997). However, it is possible to find a gap in the literature concerning the relationship between the level of control in IJV and their prior FDI experience with the duration of the alliance.

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8 "Considering the International Joint Ventures majority partner strategic level of control, does the previous FDI experience of both partners imply that the duration of the alliance is longer lasting?"

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2. Theory

Literature Review

Within the international business literature, there is much research on this subject. The present research will mostly focus on the ownership level of control of established IJVs and on the influence (or not) on their past international experience through FDI. For specifically, if both will lead to longer duration of the covenant. The literature and theories explained below are all, in some way, related and connected to the level of control in IJVs. Recognized and well-known journals in the area of management and international business were used in our review. Their studies were selected not only due to the influence of these journals in the management field but also because they are empirical journals and research oriented in areas of international and strategic management. Table 1 provides a summary of the Journals included in our Thesis (see Appendix E for the full table).

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Transaction cost economics (TCE)

Transaction cost economics (TCE) explains why IJV mode of governance can be chosen over alternative methods, such as licensing or acquisitions. In transaction cost theory, Foreign Direct Investment (FDI) and the choice of several entry modes is based on concepts of bounded rationality and opportunism. In fact, the possibility of opportunistic behavior by a partner generates the most salient transaction costs in the alliance context.

Other scholars suggest that a partner firm in IJVs might behave opportunistically by pursuing its own unilateral gains at the substantial expense of another partner or the joint venture entity (Ali and Larimo, 2016; Luo, 2008). Hennart and Zeng, 2005, regarding TCE, holds that the IJVs should be structured in ways that reduce the partner's purposes for opportunism.

Furthermore, TCE suggests that by sharing equity in joint ventures it's possible to mitigate appropriability hazards (Gulati, 1995). Firstly, joint ownership reduces the motivation of both partner firms to deceive the agreement and encourage the optimal joint behavior. Secondly, through a shared managerial control and shared board membership will improve partner’s capabilities to better coordinate and monitor the alliance activity. Finally, will increase the confidence and trust in the joint venture and between the partners in relation to specific assets know-how.

Strategic Ownership level of control

The level of control is an essential indicator of the performance of joint ventures (Child & Yan, 2003). MNEs often increase their level of control over the cooperation due to endogenous success factors in order to, firstly, eliminate risks due to the lack of trust in the partners (e.g. avoiding opportunistic behaviors) and secondly, to achieve success (Beamish, 1993; Gulati, 1995).

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11 control efforts, firms are likely to experience great difficulty in coordinating activities, on implementing strategies and managing IJVs in general.

Control refers to the process, within the use of power, authority, bureaucratic, cultural and informal mechanisms, to influence members to act in directions that lead to the attainment of organizational goals (Geringer & Hebert, 1989; Yan & Gray, 1994). In our study, we refer to alliance control as the ownership over a joint venture, rather than, as Patzelt & Shepherd, 2008 studied, partner control.

In this sense and according to Child, 2002, IJV control is based on two types: Strategic and Operation. Our study will focus on the first one. In fact, Strategic control, being more based on capital resources, is the type of control that will affect the means and methods in which the whole conduct of an organization will depend on. Some examples may include the deployment of capital or the design of certain strategic priorities (see Appendix F). However, the non-capital control, or as we named earlier as Operation Control, is also crucial on the performance and alliance’s duration. It is responsible for the production process within an organization, which is enhanced by the increase of dependence of the joint venture (see Appendix G). This is reflected in high commitment by the parent firms to the alliance (Child, 2002). Despite of what Tsang, 2002 stated regarding the fact that a parent firm will not gain much from its joint venturing experience, MNEs cannot ignore the control-performance relationship in the implementation of the alliance and need to maintain a reliable level in terms of capital and non-capital control to create a strong connection with the partners in the alliance so to keep the stability of the joint venture. It is often to see some joint ventures being treated by one of the parent firms as a pure financial investment (see Appendix H). Which means, in many cases that these parent firms play the role of a silent partner and departs from the alliance.

International Experience - Foreign Direct Investment (FDI)

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12 routines and problem-solving skills to the new setting, improving Foreign Direct Investment performance. FDI is an investment that takes place when an entity in one country establishes a business operation, in the form of controlling ownership, in another country.

Anand & Khanna, 2000 found strong evidence that firms learn to create more value as they accumulate experience. Other authors also suggest that alliance experience is positively correlated with a firm’s overall alliance success. By accumulating past experiences firms learn how to better manage their existing alliances and they are more able to access and accumulate knowledge from the experience of other cooperating relationships (Kale et al., 2002).

Kale & Singh, 2007 argue that learning from former experiments means accumulating and leveraging know-how to develop the skills of alliance’s management. The number of alliances a firm has engaged can be used to indicate the level of alliance experience that the firm possesses (Robertson & Gatignon, 1998). In other words, through international investment acts, FDI, firms will gain, among other perks, more experience to take advantage and to develop in future international businesses. This way they will be able to promote the development of new and creative solutions for handling cultures (Hargadon and Fanelli, 2002), besides increasing the possibility that the company will manage to discover profitable business opportunities.

One of the effects of FDI experience is directly linked to the fact that companies, MNEs, with former experience overseas are more able to store and embed lessons in the IJV. This former experience will lead to a more competitive advantage in terms of knowledge management (Tsang, 2002).

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Hypotheses and Conceptual Model

Two research goals will be tested in this study

Firstly, it is logical to assume that a MNE, with a higher concentration of their ownership control over the IJV, the longer it will influence the duration and the performance of the alliance. Consequently, there will be also a positive relationship with their majority partner strategic ownership level of control over the IJV, resulting in a higher effect on the duration of the alliance. Thus, the hypothesis is formed as:

Hypothesis 1a: Strategic ownership level of control by the majority partner increases the duration of the IJV

Secondly, does not exist any literature regarding an exact interaction effect of strategic ownership control and FDI experience. However, we know that being inexperienced from international markets activities may be a disadvantage in international businesses. In such cases, we expect that a MNE, without former FDI experience, will influence negatively the performance of the alliance. There will be also a negative relationship with their majority partner strategic level of control resulting in a lower effect on the duration of the alliance.

Therefore its theorized that the strategic ownership level of control by the majority partner firm has a positive influence on IJV duration. Regarding the FDI experience that also have an expected positive sign, the combined multiplicative effect should logically be even more positive.

Thus, the hypothesis is formed as:

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3. Data and Methodology

Research Strategy

Since the alliance and IJVs literature is quite extensive, such as the FDI literature, a theory testing approach is used to develop hypotheses that can be tested using data from different databases as we already explained. Once this study is applying a quantitative research method, it is necessary to collect a reasonable amount of data to prove a statistically significant result. Data was collected from existing databases to test the hypothesis to fit with a quantitative deductive research approach. Statistical analyses are also used in order to find out whether there are significant relationships between the variables, meaning that, the majority partner strategic ownership level of control in IJVs and their former FDI experience has a statistical significance in the duration of the alliance.

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Research Design and time horizon

The research design is based on the positivism philosophy, essentially concentrating on observable reality. Thus, we conduct a deductive research approach in order to form and test our hypothesis based on the observations and data collected.

Initially, the time period chosen for our study was comprised between 2009 and 2016. The reason for this choice was that it would not only cover a recent analysis of IJVs formed, but also because it was a period that coincided with the start of the global financial crisis that occurred in 2008. We all know that the financial crisis has had a brutal impact on the world economy and has affected thousands upon thousands of companies around the world and in all sectors of our society. MNEs and firms, in general, put their alert and sensitivity mode in high ranks. Thus, more control measures and risks precautions were taken by MNEs and IJVs activities all over the world.

As soon as we started to collect and to analyze our data, it was immediately perceptible that the quantity of significant and relevant data was insufficient. As a result, we took the decision of increasing our period for a span of ten years between 2006 and 2016 as a way to increase the eligible number of IJVs to our research.

In addition, this will be a cross-sectional research.

Measurement of variables

The subsequent sections will present the variables adopted in this study, namely the dependent, independent and the moderation one.

Dependent Variable

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16 By measuring the duration of the IJV it will be possible to predict the performance and the success of the alliance. However, this performance when measured, emphases some issues such as: goals variation that could exist between partners in the alliance, the nature of the industry and the nature of the relationship. It is also mandatory to point out the fact that the IJV duration or longevity does not mean or indicate the success of the alliance since not all alliances and IJV are formed with the intent to last forever (Gulati & Zajac, 1998).

Our basic assumption, using the duration as our dependent variable, is that the longer the IJV survives, the more successful it is. Like Inkpen & Beamish, 1997 and Ren et.al, 2009 studied, IJVs are expected to be sustainable only as long as it represents an efficient organization mode. Despite of this assumption not always sustain since, the opposite, the termination of the IJV is not always a sign of failure, indeed it may actually refer to a sign of success because IJVs may terminate once the partner firms have successfully accomplished their goals (Geringer & Hebert, 1989; Kumar, 2005).

Yet, what we intend to study and analyze is that, the variables that lead to this higher or lower durability of IJV are other good indicator of the overall performance and survival of an alliance. In addition, by measuring the duration we will have another analyses tool to measure IJV performance.

Independent Variable

Based on our conceptual model, we can recognize the Strategic level of control in IJVs as the independent variable of our study. We emphasis our study on the IJV ownership structure notably on the strategic level of control1. Many scholars have been debated over the years regarding the definition of the optimal level of control on an IJV ownership structure that leads to best performance. On one hand, we have those who argue that one of the partner firms should have the greatest power over the IJV in order to minimize conflicts between partners and minimize opportunistic behavior (e.g. Ding, 1997; Geringer & Hebert, 1989). On the other hand, there are those who argue that efforts must be made to balance the

1_{It is important to point out that other factors apart from IJV ownership stakes can affect the level of control}

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17 ownership structure since it will lead to greater involvement of both partners in terms of quality and trust in IJV (Beamish, 1985; Blodgett, 1992; Steensma and Lyles, 2000). It is also clear that the ownership level of control over the IJV will have implication not only on the partners of the IJV but also on their commitment and responsibility in the IJV.

Although we know that ownership level is one of the many ways of measuring control, since there are other control mechanisms, such as management control that could be more precise in the study of the performance of IJVs, our objective in focusing on IJV ownership level of control was also for its theoretical significance and measurability, which allowed us to test our hypotheses.

Finally, we aim to measure the strategic ownership control by the majority stake owned after the incorporation of the IJV. In this case, the majority strategic level of control can have two scenarios. With an asymmetric distribution, there is a main owner that can exercise its legitimate control and it can be the majority foreign partner firm or the majority local partner firm. Additionally, there is also the case of equally owned IJV where both partners have a 50%/50% ownership. More particularly, we argue that by obtaining a greater percentage, the partner firm can exercise more control over the alliance. We are confident with the selection process of the current independent variable based on available knowledge: a higher level of control can generate more value but it can also represent a longer duration for the alliance. This variable is taken from the Orbis database.

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Figure 2: Majority stake owned by the foreign partner

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Moderating Variable

We can identify the FDI previous experiences, based on our conceptual model, from the parent firms, as well as with the moderating variable. To test our hypothesis, we measured our moderating variable by aggregating the number of cross-border subsidiaries owned by both parent firms. In other words, we sum up the number of cross-border subsidiaries owned by each of the individual firms and used the total number of cross-border subsidiaries to measure past FDI international experience. Measuring foreign experience will capture the number of occasions a firm has had the opportunity to learn from its experiences. In addition, it is relevant to say it was also used by Delios & Henisz (2003) and Tsang (2002).

Besides, this will be a determinant variable for our analysis and study of the IJVs’ durability. Through external investment and consequently, the experience gained from it, (1) the experience gained in the past is only effectively powerful and transferred if it is shared and distributed, (2) experience sharing leads to broader based organizational learning (Huber, 1991), and (3) sharing experience is essential for raising the lessons learned from overseas ventures from an individual to an organizational level (Tsang, 2002).

Furthermore, the institutionalization of experience became a very important factor regarding the duration of the IJV. After IJV has been operating for a number of years, the parent company’s ability to instill knowledge, experience, and practice gained in the past will be crucial towards the continuity and durability of the joint venture.

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Controls

To better continue understanding and improve our model, we considered several factors as control variables.

Industry Relatedness

Considering our study, it was important to highlight the importance of the industrial sector in the context of IJVs. We predicted that the industry relatedness sector between partner firms, as well as the IJV itself, could offer and be another indicator of the durability and performance we are analyzing. The greater the relatedness and the greater the reconciled connection between the partner firms, the longer the joint venture will last. Given this, dummy variables were created. We measured the Industry relatedness, as we can see in Figure 4, by giving the value 1 if the majority partner, local or foreign, has the same industry sector as the IJV. Otherwise, if none of the majority owners has the same industry sector as the IJV, it takes the value of 0, see Figure 5. In the case of IJVs with equally owned stakes, where both partners have a 50%/50% ownership, the value of 1 was given to the cases where both partner firms have the same industry sector as the IJV (Figure 6). Otherwise, it takes the value 0, see Figure 7.

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21 Figure 4:

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22 Figure 6:

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23 Actual International Joint Venture performance

For this control variable, we used the revenue/turnover data corresponding to the first year of activities of the IJV. In other words, the first year after the incorporation date. We measured, through the Zephyr database, the “Post-deal IJV operating revenue/turnover (EUR)”. Furthermore, we predict that this variable will be determinant to our study as well as for the durability of the IJVs. Indeed, a healthy and an encouraging financial result, in terms of the operating turnover, in the first year of operations will be a predictor not only for both parent firms but also for the IJV itself. Forecasts and expectations on what the venture might achieve, in the subsequent years, are embedded on manager’s strategic plan and goals for the IJV. In these sense, we believe that this variable is another indicator to include in our study.

IJV size – Number of employees

Our final control variable is concerned with the size of the IJV in terms of the number of employees as Lavie (2007) and Lahiri & Narayanan (2013) did it. We calculated the average of the total number of employees over the years of existence of the IJV in order to capture their vitality. We expect that as organizations grow, more complex will be the decisions and more people will be involved in the organization. Even more, in alliances like IJV, with the cultural and geographic diversity present, as the companies grow more complex is its management. Thus, IJV size was another variable we expected to help us explaining the durability of IJV.

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Empirical Model

Presented below the empirical model used for the regression analyses:

𝒀_𝒊 = 𝜷_𝟎+ 𝜷_𝟏𝑺𝑶𝑪_𝒊+ 𝜷_𝟐𝑭𝑫𝑰_𝒊+ 𝜷_𝟑𝑰𝒏𝒅_𝒊+ 𝜷_𝟒𝑬𝒎𝒑_𝒊+ 𝜷_𝟓𝑷𝒐𝒔_𝟏+ 𝜷_𝟔(𝑺𝑶𝑪_𝒊∗ 𝑭𝑫𝑰_𝒊) + 𝜺

Where,

𝑌𝑖 Duration of the IJV, difference, in time, between the incorporation and completion dates of the joint venture's activities i

𝛽𝑋 Parameter values

𝑆𝑂𝐶_𝑖 Percentage of majority Strategic ownership level of control of

the IJV i

𝐹𝐷𝐼_𝑖 FDI – International experience, through the number of total cross boarder subsidiaries owned by each one of the parent companies of the IJV i

𝐼𝑛𝑑_𝑖 IJV Industry relatedness dummy control variable of the IJV i 𝐸𝑚𝑝_𝑖 IJV size control variable – Number of Employees from the IJV

i

𝑃𝑜𝑠_𝑖 Actual IJV performance – First year operating revenues of the IJV i

𝑆𝑂𝐶_𝐼∗ 𝐹𝐷𝐼_𝑖 Interaction term, where the percentage of the majority Strategic level of control of each partner firm is multiplied by the total number of cross-border subsidiaries owned by each partner firm of the IJV i

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26 The reason why we chose a regression analyses was the purpose to find a relationship amongst our variables. We also aimed to explain the statistical tests used to analyze our hypothesis.

Data

Data collection

We test our hypothesis using panel data on International Joint Ventures. Secondary data was used in this study and was drawn from both the Zephyr database and Orbis database. The former database was used to provide extensive information on joint ventures and cross-border acquisitions from online historical and recent financial transactions in order to measure the strategic ownership level of control by the parent companies.

After the extraction of IJVs data from the Zephyr, Orbis was used once it provided financial, market, and other relevant information on companies worldwide. This second database was a crucial tool to collect and analyze our data stemming from Zephyr.

Secondary data was used in this study as an alternative of primarily data, which would have been extremely time-consuming. Therefore, through the empirical analysis, we expect that the hypotheses should be supported by the data and the research question should be able to be answered.

Sample Selection

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27 "completed-assumed" in order to study only companies already established. Finally, a further specification on "All deals with more than one partner" was needed to guarantee that we have IJVs formed by two parent companies where we could later analyze our independent variable - the strategic ownership level of control by the majority partner.

This initial selection resulted in a total of 9,791 cases. However, some observations were eliminated for three reasons. Firstly, we eliminate all the information that was non-relevant for our study. Secondly, we removed all observations with insufficient data provided by the databases. Thirdly, we did these in order to secure homogeneity/uniformity of our sample. This was all done before going deeper on Orbis database for more detailed information regarding our IJVs. For this, two criteria were added to our initial search.

Firstly, the "IJV company status" with the aim to distinguish Active from non-Active IJVs. Secondly, we looked to the "IJV company date of incorporation" not only to verify if the IJVs were inside our time sample but also to analyze further in this study our main variable: the duration of the IJV. Consequently, in this first raw sample, all deals without sufficient information on variables regarding, IJV status, incorporation date and all deals in which the incorporation date was outside our time span, were ignored.

After this first process, we end up with 1,486 cases. Hence, we moved to the treatment of information from the Orbis that helped us verify and double-check the information provided by Zephyr regarding our initial sample.

This second database provided detailed information from both IJV and parent companies. Among other relevant information we highlight the status of the IJVs, incorporation and completion dates, number of cross-border subsidiaries by the parent companies, industry sector and countries of origin of both IJV and their partners.

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28 sufficient information or missing values on both, IJV and parent companies were excluded from our sample.

At this stage, we took the decision to narrow even more the sample in terms of the number of partners and country of origin. On one hand, we focused on the IJVs with only two partners. In fact, many scholars argue that the complexity and number of partner firms, when more than two, can have an indirect and negative effect that can influence the performance of the IJV. Among such effects Hill & Hellriegel, 1994 and Shenkar et al., 2007 highlights the high coordination costs and possible goal conflicts. Additionally, the authors state that with more than two partner firms it becomes harder to not only manage successfully the joint venture but also the measure and monitor a firm’s performance. Furthermore, we were in the presence, in our sample, of only four IJV cases with more than two parent firms, so due to the low and very insignificant number of these cases we took the decision to not include IJVs with more than two partners in our study. On the other hand, at this point, there was still a number of IJV deals formed by parent companies from the same country of origin. Consequently, it was necessary to exclude them because, even though these deals were joint ventures, they did not fulfill our international component prerequisite. Additionally, IJVs based in offshore financial centers such as Bermuda, British Virgin Islands, Bahamas or Cayman Islands have been also eliminated. By applying these criteria, it was possible to reduce the number of occurrences to a more relevant sample with a size of 81 observed IJVs.

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Figure 8: Distribution of the partners by country

Figure 9: Distribution of the International Joint Ventures by country

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30 and Germany presented the highest frequency. It is also interesting to see, in Figure 9, how our IJV cases are distributed on our globe being easy to identify a high level of diversity and internalization.

To complete and conclude this section, we considered important to present an integrated overview of some specific transactional characteristics. Those characteristics can be seen below in Table 3, and comprise industry relatedness, ownership control (stake) by the parent companies, and the number of IJV formed before and after the global financial crises in 2008.

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Method

Our analysis will start with a description table of results of the main variables. Next, we employed Pearson's correlation coefficient in order to continue analyzing the relationship between our variables and consequently we controlled for multicollinearity and heteroscedasticity. Finally, the regression analyses was done and used cluster-robust standard errors to account for heteroscedasticity and residuals2.

4. Results and Discussion

Descriptive Statistics

Table 4 displays our final sample with a total of 81 IJVs observations, spread through 15 industries, dispersed over 26 countries and, each one of them with two parent companies. The most common partner’s industry sectors are “Machinery, equipment, furniture, recycling” (N=21), “Wholesale & retail trade” (N=12) and “Other services” (N=65) and the most common IJV industry are “Machinery, equipment, furniture, recycling” (N=7), “Transport” (N=6) and “Other services” (N=29). Countries like United Kingdom (N=14) and Russian Federation (N=7) are the ones who have more implemented IJVs in our sample.

For the Duration of the IJV (N=81), measured by the years that the joint venture was active, ranged from 1 to 10 (Mean=5,1605; SD=2,5055). The IJV that has been active for the longest period in our sample belongs to three companies that had their main activities in the “Wholesale & retail trade” and “Other services” sector and was located in the Russian Federation. The shortest ventures were reported by four companies in the “Machinery, equipment, furniture, recycling”, “Health & Education” and “Other services” in Brazil, United Kingdom, China and Bulgaria, respectively.

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Table 4: Descriptive Statistics

Additionally, as previously mentioned, the strategic ownership control, measured by the percentage held by the majority owner or equally owned by both partners if it is a 50/50 percent joint venture ranged from 50% to 85% (Mean=53,6111%; SD=7,7201%). The most common observation in our sample is cases with 51%/49% from the acquirers. In the total of the 81 IJVs, 38% had both acquirers with equal control (50%) over the IJV, 37% had foreign majority ownership and 25% with local majority ownership.

Moreover, the former FDI experience, measured by summing the number of cross-border subsidiaries owned by both partner firms, varied between 0 and 834 (Mean=69,5062; SD=156,3368). The IJV with a highest number of cross-border subsidiaries by their both parent firms have 834, while the lowest have 0.

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33 The number of employees (N=76) varied between 2 and 32.260 (Mean=2.574,7268; SD=6.642,4260). The IJVs with largest number of employees had an average of 32.260 and 27.056 employees during 2 and 4 years of existing, respectively, while the lowest average number of employees during the existence of an IJV had 2 employees.

The Actual IJV performance (N=37) ranged from 5.000 € to 236.963.551,29 € in the IJVs post-deal IJV operating revenue (Mean=20.238.726,49; SD=46.622.999,30). The lowest post-deal IJV operating revenue are 5.000 € and 36.409 € and belongs to IJVs in the “Other services” and “Machinery, equipment, furniture, recycling” sectors, respectively, and who remained both active during a period of 7 years. The highest values concerning the post-deal IJV operating revenue from IJVs in our study, between the years of 2006-2016 were 144.060.309 € and 236,963.551,29 €. These two firms remained both active during 8 years. In other words, we can see here a possible relation between the actual IJV performances after the deal was announced in the first year of existence with the duration of the IJV.

Correlation

In this section, we employed Pearson's correlation coefficient in order to continue analyzing the relationship between our variables. Our main correlations are described in the following table 5 and, as we can see, there are three significant correlations.

Marked with two (P<0,01) and three (P<0,001) asterisks are the significant correlations. We can observe that there is a significant correlation between the Actual IJV performance and the duration of the IJV (r=0,3243; P<0,01), suggesting an increase in the duration of the IJV when the first year operating revenues is high. Hence, there is no significant correlation between our independent variable and the duration of the IJV. This indicates that our hypothesis 1a may not be supported in our analyses.

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34 interaction term practically replicates the effects of the moderator. It also indicates that the relationship effect hypothesized in 1b may not be supported in our analyses.

Moreover, the third correlation that we can observe concerns the IJV size, as we measured by the average number of employee’s over the years of existence of the IJV, have a negative correlation coefficient (r=-0,2886; P<0,01) with the duration of the IJV. Meaning when the IJV size increases the duration of the IJV tend to depress.

In addition, the relation between FDI international experience and the duration of the IJV does not have a significant statistical relationship.

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36

Multicollinearity

After concluding, the correlation test explained above, we controlled for multicollinearity. As we observe in table 5, one of the Pearson correlation coefficients is 0,8 or higher, our interaction term (r=0,9997; P<0,001). However, it is logical to see that the coefficient value represents an almost perfect correlation since the multiplicative interaction term it is heavily correlate with their respective separate term. Nevertheless, we conduct two VIF tests, one with all the variables present in our study and another one without our interaction term.

Regarding the first test, we are in the presence of almost a perfect correlation between our interaction term (Strategic ownership control*FDI international experience) and our moderate variable. In order to be sure that there is a presence of multicollinearity, we conducted a VIF (variance inflation factors) test. The VIF test will measure to what degree the estimated coefficients are inflated as a result of collinearity.

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38

Heteroscedasticity

In addition, in order to test and detect heteroscedasticity in our model we run two separate diagnostics. In the OLS regression, one of the main assumptions is the homogeneity of variance of the residuals. On one hand, if the model is well fitted, there should be no pattern to the residuals plotted against the fitted values. On the other hand, if the variance of the residuals is non-constant the residual variance is heteroscedastic. The two diagnostics are present bellow.

First, a graphical way to test the variance in the residuals (Figure 10), since and according to Stock and Watson, 2003 the variance in the residuals has to be homoscedastic or constant, otherwise, the error term is heteroskedastic.

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39 Second, a non-graphical way, using Breusch-Pagan test.

Figure 11: Breusch-Pagan test for heteroscedasticity

We can see that the null hypothesis is constant variance meaning that there is no heteroscedasticity. In addition, the results shows a p-value of 0,8124 meaning that we reject the null hypothesis that our results are not heteroskedastic.

Heteroscedasticity does not cause the OLS coefficients to be biased, however it may cause the OLS estimates of the standard errors of the coefficients to be biased. A regression analysis using heteroscedastic data will still provide an unbiased estimate for the relationship between the independent variable and the outcome. Hence, standard errors and therefore inferences obtained from data analysis may be less reliable. The consequence of having biased standard errors may lead to wrong assumptions when rejecting the null hypothesis.

Additionally, according with Stock and Watson, 2003 we should always assume heteroscedasticity in our models.3_{To deal with heteroscedasticity, we used} heteroscedasticity-robust standard errors.

3_{By default STATA assumes homoscedastic standard error, so we need to adjust our model to account for}

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40

Regression results

In this section, we will analyze the results of our multiple regression. Our analysis was conducted through the OLS multiple regression tests and it can be seen in Table 8. We started by splitting our analysis into different models, more specifically, five models in total, in order to better analyze our variables and their relationship with the duration of the IJVs.

Starting with the first model, Model 1, we simply included and tested the effect of the first year operating revenues, excluding all the other variables. In Model 2, we only included and tested the direct effect of the majority strategic ownership level of control, our independent variable. Using the same procedure, with the purpose to analyze only our explanatory variables in our conceptual model, and, above all, to analyze them individually with the intent of explaining the relationship with our dependent variable, in model 3, we included the FDI international experience, our moderate variable, for analysis. Furthermore, in Model 4, we included not only our two main variables, majority strategic ownership level of control and FDI international experience but also the interaction term between them. In other words, we incorporated the interaction effect between our predictor variables. Finally, in Model 5, we took into account all variables used in this study, excluding the control variable, Actual IJV performance, due to the lower and poor number of observations.

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41 As we explained above, in Model 2, we tried to test our Hypothesis 1a, checking whether the majority strategic ownership level of control indeed influence the duration of the IJV, but we found that the coefficient is insignificant for all standard confidence levels. In an attempt to verify whether the former FDI international experience moderates the relationship between the strategic ownership level of control and the duration of the IJVs, we run a regression that we can examine in Model 3. In this particular case, the coefficient is significant at a 5% level. These result is similar to what has been discussed, former FDI experience could lead to a higher duration of IJVs. Continuing our analysis of the various models created, we can see that from Model 2 to Model 3, both 𝑅2 and adjusted 𝑅2 increases. However, in Model 4 when we included the interaction term and the independent variable, majority strategic ownership level of control, the model loses explanatory power, as we can see by the decrease on the adjusted 𝑅2 to negative values. However, in Model 5, when we add all the variables, excluding the Actual IJV performance, our model gains explanatory power. This can be seen by the significant increase of both 𝑅2_{and adjusted 𝑅}2_.

Still, regarding Model 4, we intend to analyze the interaction term. Having said this, we see that even if the company has a high former FDI international experience, an increase in their majority strategic ownership level of control does not impact the duration of IJV. Therefore, and since Model 4 particularly tests for our second hypothesis, Hypothesis 1b which states that the relationship between FDI experience and Strategic ownership level of control by the majority partner increases the duration of the IJV, it has been observed that this relationship has an insignificant effect on the duration of the IJV. Due to these results, both hypothesis 1a and 1b, are not in accordance with our initial expectation, which was that, firstly, the majority strategic ownership level of control increases the duration of the IJV and secondly the relationship between our independent variable and moderator would have some sort of impact on our dependent variable, thereby we feel confident to reject both hypothesis 1a and 1b.

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43

Discussion

The initial motivation to analyze and study a current topic from our day-to-day life has come to be confirmed throughout the conducted work during the process of developing the present dissertation. Across the world, IJVs have been a subject of particular interest and attention not only of researchers in the area of international business, but also of media, as previously mentioned. It was also with this intention and with the will to analyze more in-depth this form of cooperative strategy that we developed this research project.

The constant assertion from several academics that IJVs are usually temporary has led us to study to which extent this duration could be linked to the majority strategic ownership level of control owned by the companies that form this kind of alliances. Allying with a strategic partner might offers many benefits as it embeds a powerful potential of competitive advantage’s exploitation through the share of resources and knowledge. In addition, it allows companies to gain access to local assets that they otherwise would not reach or, if they could it would imply higher transaction costs. Furthermore, allows the access to new distributions and connections network and to new markets (Barringer & Harrison, 2000). All these evidences are elucidating for the fact that the relationship between alliance partners is central regarding the stability, duration of the future joint venture and its performance success (see Appendix I). That is, control mechanisms and a strong ownership structure are essential to achieve the desired results and a long-lasting longevity in IJV.

Through empirical analysis, using proxies from both Orbis and the Zephyr database, 81 established IJVs were analyzed between the years 2006 and 2016. Hence, we sought to know whether former FDI experience moderates a relationship between strategic ownership control and duration of IJV.

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44 equally owned by both partners if it is a 50/50 percent joint venture. Since the duration of the IJV was our dependent variable, which was measured by the difference, in time, between the incorporation and completion dates of the joint venture's activities. Furthermore, and due to the degree of importance that experience has on the relationship between people and companies in the performance of an alliance, a new variable was included in our study. Tsang (2002) states that sharing and transferring international experiences is essential for raising the lessons learned from overseas ventures from an individual to an organizational level. In this sense, we proposed to study whether the relationship between former international FDI experience and the majority partner Strategic control would influence the duration of IJV.

This study aims to answer the research question: Considering the International Joint Ventures majority partner strategic level of control, does the previous FDI experience of both partners imply that the duration of the alliance is longer lasting?

Moreover, our moderate variable is measured by aggregating the number of cross-border subsidiaries owned by both parent firms.

According to the mentioned above, our hypothesis 1a predicted that the Strategic ownership level of control by the majority partner firm increases the duration of the IJV. In the case of Hypothesis 1b, is expected that the relationship between FDI experience and Strategic ownership level of control by the majority partner will also increase the duration of the IJV. Thus, we conducted a multiple regression analysis, which we split into five different models. Our second and fourth models tried to support our two hypotheses. Indeed, we did not find, through the second model, statistical evidence that the Strategic ownership of level of control by the majority partner increases the duration of the IJV.

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45 However, through our fifth and last model, where we included all the variables in the analysis, excluding the Actual IJV performance, significant results were evident between the relationship of the IJV size and the duration of the IJV. Even though, we must not forget, as we have mentioned earlier, that the reduction in sample size to 76 was observed in this case, significant results were observed. From this, we can infer and explain that an increase in the number of employees of the IJVs will lead to a lower duration of the IJV.

To conclude and answering our research question, the lack of significant results seems to indicate that both the strategic ownership level of control by the majority partner and the relationship with former FDI experience do not have an influence on the duration of the alliance. Although we did not find strong support for our theory, we did observe a significant relationship between the variable FDI experience and IJV size with the durability of joint ventures.

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5. Conclusions

In this final section regarding our research paper both Theoretical and Managerial implications are addressed. Right after, we end with the identification of limitations of our study and recommendations for possible future research.

Theoretical Implications

We can assume, from a theoretical perspective, that our research contributes to the existing literature. First, our study may serve as a basis for future research on the relationship between the strategic ownership control and the duration of IJVs. As we could conclude from the existing literature, there is still a gap when attempting to study the performance of IJVs due to the existing series of explanatory and complementary variables that describe why the level of control should be taken into account regarding the formation, success, and duration of IJV. Having this said, and in line with other authors, we can identify a need to elaborate a theoretical framework that is appropriate to explain the individual relationship of strategic ownership level of control by the majority partner in the durability of IJVs.

Secondly, input through the effort to develop and to advance the understanding of the concept of performance in IJVs and the impact those previous international experiences may have on the durability of IJVs. Consequently, we follow the line of need for additional theory related with the role of IJVs ownership structures in facilitating the relationship of joint ventures control with their performance (Li et al. 2009; Groot & Merchant, 2000).

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47

Managerial Implications

As more and more IJVs fail to realize parent firm’s expectations, a need for a more inclusive discussion regarding the factors enabling the success of international strategic alliances has become extremely necessary. We then propose a few suggestions and implications for the daily business activities, more specifically for managers who are in charge of multinational enterprises. Even though our study was about International strategic alliances, more precisely IJVs performance, the variables used in our study cannot be ignored.

Despite of not being proved significance between the level of control exercised in the IJV by the majority partner and their duration, it does not mean that the IJVs would not have had success. As we know, and unlike alliances such as R&D partnerships or licensing agreements, contracts between IJV partners are often executed under conditions of high uncertainty and, therefore, it is highly unlikely that all future contingencies in an IJV can be anticipated at the outset. As IJVs grow, they may develop a distinct identity and culture from the partners, intensifying the coordination problematic. In addition, the collaborative motives for IJVs are often different from other alliances. Therefore, managers should interpret carefully statements, which tend to generalize about the duration of IJVs. When, for example, both partner firms plan for termination at the time the IJV is formed, the duration or the instability will not be a concern unless termination occurs prematurely. A stable IJV, which will last for as long as necessary, is the one the partners believe the benefits to the relationship exceed the costs of ending the joint venture.

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48 This is the reasoning that clarifies the following question - why previous experience of FDI has been found to increase firms’ propensity to form new ventures.

Finally, to sum up, it is important that managers remain aware that it is not enough to focus on the benefits of strong management over IJVs, rather than the argument in favor of strong management over an alliance. It is also required to be patient when exploring a new alliance partnership, having always in their minds that IJVs are often temporary.

Limitations and Future research

Our study was an effort to understand and analyze the nature of strategic ownership control power between the IJVs parent firms and its implications on the durability of the IJV, however, our research has some limitations and we hope to inspire future researchers in the International Strategic Alliances field as well as in the IJV domain.

The first concerns are associated with the degree of generality of our data and findings. The fact that we have not studied a particular economy, a country or a region or even a specific industry, leads us to question whether our findings can be replicated in more specific situations. In this sense, future research should be extended in a more particular way such as specific countries, economies (e.g. emerging and/or developed markets), and industries. Since we use only secondary data from our databases, limitations on the quality of our sample occurred. Consequently, our second limitation was limited not only due to the sampling size, since it was relatively small, but also due to the difficulty to have access to available data from both IJV and parent firms. Due to these limitations was challenging to obtain findings. Given the large and growing importance of IJVs, future researchers must choose carefully their databases but if it is possible they should opt to use primary data.

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49 Furthermore, we only considered the implications of ownership structure on strategic control. As a result, it would be recommended for future research to expand the scope of our study to different types of control mechanisms and how they are reflected in the performance of joint ventures.

Moreover, and because any type of alliance is carried out by people, namely by managers, it would also be a recommendation for future research to study the choice criteria when the partner selection happens and how each context (e.g. emerging market) may or may not lead to greater success on the durability of the future IJV.

Finally, in our research, we highlight one management and theoretical perspective, which we consider an excellent indicator for the IJV analysis. This perspective was the Transaction Cost Economics. Due to this, we excluded some other theories and perspectives that would also contribute to IJV performance results (e.g. RBV, RV or Knowledge-based theories).

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7. Appendices

Appendix A

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56 Appendix B

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57 Appendix C

Source:

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58 Appendix D

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59 Appendix E

Appendix F

China Joint Ventures example regarding strategic ownership control. Foreign partners tends to focus on Strategic control.

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60 Appendix G

Joint Ventures example regarding Operational control with a foreign partner. Exerting Operational control might be difficult in a foreign environment

Source:

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61 Appendix H

Accordingly with the author, the above table is not static, in practice, will depend on the growth of the IJV. Source: Jan Kruse, (Wavin) 2015

Appendix I