Unveiling the relationship between MNE`s CSR agendas and the (in)stability of Joint ventures Insights from East Africa

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Unveiling the relationship between MNE`s CSR

agendas and the (in)stability of Joint ventures

Insights from East Africa

By:

Angesom Habte Girmay

s2531968

angesom.habte.girmay@student.rug.nl

Master`s Thesis

MSc International Business and Management

June 2017

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Abstract

This study investigates the role of host-country political risk and law unenforceability on the (in)stability of international joint ventures (IJVs). Adopting a case study method in two international JVs the study is the first of its kind to investigate IJV instability in the East African region. The study contributes several practical and theoretical insights. Theoretically, the findings substantiate the notion that political risk and poor regulatory environment poses crucial threat to the stability of IJVs. It also shows that the pursuit of firm legitimacy in the eyes of host society and government is an effective hedge against political risk and IJV instability. When perceived legitimate, parent firms, especially the multinational enterprise (MNE) face less (no) intervention from the host government and it is likely that the JV will remain stable. In contrast, the less legitimate an MNE is perceived, the more political risk it will likely face, and the more unstable the JV will be. Practically, the findings suggest that when entering a JV in politically risk countries, firms need to proactively seek and carefully select the right partner with context-specific knowledge. Moreover, MNEs’ facing severe illegitimacy and political risk can improve their legitimacy by, for instance, building and fostering strong stakeholder relationships. In this study, MNEs are provided with important recommendations on how to overcome IJV instability.

Keywords: Emerging countries; International joint ventures; Joint venture instability; Political

risk; Law unenforceability; Transaction cost theory; Legitimacy; Corporate social responsibility

Acknowledgements

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1. Introduction

Recently, international joint ventures (IJVs) have become a highly popular strategy for entry into international markets. This is evident from the rapid increase in the number of IJVs formed between firms across the border. IJVs play an important role as a vehicle for bringing in foreign direct investment (FDI), something that is critical for improving the economy of the host country (Kabiraj & Chowdhury, 2008). At the same time, IJVs appear to be quite unstable and often short-lived. This has been investigated by several authors, including Nakamura (2005), Inkpen and Beamish (1997), Blodgett (1992), and Kogut (1989). Kogut (1988), for example, finds that out of a sample of 92 United States-based joint ventures, 50% of the joint ventures were unstable. This raises the issue of why some joint ventures are more stable than others. While there has been some recent studies on IJV instability (e.g. Nakamura, 2005; Yan and Zeng, 1999), several aspects of this phenomena remain ill understood.

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literature is based largely on joint ventures owned by firms from developed countries that operate on developed Western countries. Spencer and Gomez (2011) posit that the developed countries and emerging countries represent different institutional characteristics. Consequently, the literature fails to provide consistent evidence about international JVs owned by firms from developed countries and emerging countries that operate in an emerging country. This study, therefore, will fill this void by investigating two international JVs that operate in an emerging country context.

By conducting in-depth comparative case study of two international JV relationships located in a country in East Africa, this thesis contributes to the extant literature on IJV instability both theoretically and empirically. First, by tracing the changes over the lifetime of two IJVs, the results allow for a more thorough understanding of the nature of IJV instability. Second, while extant research has focused mainly on IJVs established between partners from developed countries, this study examines two IJVs formed between a parent firm from developed country and a parent firm from an emerging country and located in the emerging country, and thereby, enriching the literature with the emerging East African country experience. Third, the study considers two important contingent variables: political risk and law unenforceability, which varies across geographical boundaries of different countries.

This study enhances our understanding and the importance of IJVs` specific institutional environment (emerging vs developed) in explaining why some joint ventures are stable and others unstable. Using the arguments from relational theory, the study seeks to extend the recent surge in scholarly attention directed towards transaction cost economics (TCE) and institutional theory in the international business arena. Furthermore, given the enormous increase in the number of MNEs entering the African continent, the study provides a platform for understanding some of this continent’s important opportunities and challenges, as well as recommendations on how to mitigate these challenges. This study, therefore, is timely relevant and of a great importance. Based on the aforementioned arguments, the study will be guided by the following research question:

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2. Literature review

In this chapter, based on the literature, a theoretical framework will be developed that explains the link between IJV instability, and host country political risk and law unenforceability. In so doing, I present the key concepts of the research question. First, the definition and formation of IJVs will be described. Then, IJV instability will be discussed. Next, the concept of host country political risk and law unenforceability followed by a discussion of their link with IJV instability will be presented. Finally, a conceptual model will be developed.

2.1. Formation of IJVs

Broadly viewed, international joint venture is an important form of foreign direct investment (FDI) and has generated a vast literature (See e.g., Li et al., 2013; Geringer & Hebert, 1989; Hennart, 1988; Beamish & Banks, 1987). An international joint venture can be defined as “an equity-sharing arrangement between two firms (one local, one foreign) that pool their resources and share risks and operational control to operate an independent business unit on a continuous basis to attain strategic objectives” (Geringer & Hebert, 1989, P. 235). The term “IJV relationship” includes the joint venture and its activities, the relationship between the parent firms, and the relationship between the parent firms and the joint venture (Van der Meer-Kooistra & Kamminga, 2015, P. 24).

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A multifold of researchers (e.g., Li et al., 2013; Lee, 2011; Yan & Zeng, 1999; Yan & Gray, 1994), have reported that IJV relationship is a dynamic and an unstable organizational form. For instance, Yan and Gray (1994) argue that as IJVs are usually long-term arrangements, they are subject to change for various reasons. Lee (2011, P. 435) further describe an IJV as “vulnerable to exogenous factors in an uncertain and hostile market environment that can lead to its demise”. However, the literature has not yet addressed the issue in detail. The present study, therefore, aims at bridging this literature gap by providing a more comprehensive understanding of IJV instability. The section below will discuss the concept of IJV instability.

2.2. IJV instability

Several definitions of instability have been used in the IJV literature. Inkpen and Beamish (1987) define IJV instability as “a major change in relationship status that was unplanned and premature from the perspective of either one or both parent firms”. They argue that usually, instability will result in premature termination of a JV, either when one partner acquires the JV business or the venture is dissolved. According to killing (1983), the shift of control rights from one partner to another is also called JV instability. Kogut (1989) used venture termination as the sole indicator of instability.

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The IJV instability literature identifies various factors that cause IJV instability. These include endogenous factors such as changes in partners` strategic missions (Harrigan & Newman, 1990), and exogenous factors such as the foreign investment climate of the host- country (Blodgett, 1992), and host-country political environment (Zhang et al., 2016). While researchers have investigated several aspects of endogenous factors, the important phenomenon of IJV instability resulted from exogenous factors remain scant. Thus, the interest of this study is IJV instability that results from factors exogenous to the IJV relationship. It explores the question of how institutional environment, particularly host-country political risk and law unenforceability causes IJV instability. The section below will examine how institutional environment could cause IJV instability.

2.3. Host-country Institutional environment

IJVs operate in multiple institutional environments across geographical boundaries of different countries. Different countries are endowed with different levels of resources and institutions of varying effectiveness. Institutional theory posits that these differences can include different types of governmental intervention in MNE strategies, varying degrees of political transparency and judiciary system efficiency, dissimilar normative obligations and expectations, as well as unique cultural values, beliefs and practices (Oliver, 1991; Delios & Henisz, 2003). Recent studies (e.g., Arslan, 2012) reported that these factors in a host-country could affect MNEs decision makers` perceptions and decisions. Hence, because of their capability to enforce unfavorable rules or constraints on the firms, institutions play an important role in determining the behavior of firms in an IJV.

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likely stimulate the emergence of IJV instability in an emerging country context. These institutional factors are: (1) host-country political risk, and (2) host-country law unenforceability. A discussion of each factor follows.

2.3.1. Host-country Political risk

The international business literature has long noted that firms’ host-country political environments can have unexpected and adverse impacts on firm profitability, a phenomenon known as political risk (Stevens et al., 2016; Zhang et al., 2016; Henisz, 2000). Although the term “political risk” occurs frequently in the international business literature, agreement about its meaning is limited to an implication of unwanted consequences of political activity government interference with business (Kobrin, 1979). Political risk also refers to the phenomenon whereby firms invest in a foreign country and experience unexpected, adverse impacts on their performance due to the host-country political environment. Political risk may arise due to the host government, as governments may engage in such actions as reneging on contracts, expropriating firm assets, or placing unexpected restrictions on transfers of money, people, or goods (Stevens & Newenham-Kahindi, 2017).

Political risk may also arise due to concerns over the country’s well-being, for example, national security, economic growth, and the host society, through such actions as protests, boycotts, terrorism, and riots (Boddewyn , 2016). Henisz and Zelner (2004) argue that political risk results in billions of dollars of lost revenue each year for MNEs and can deter firms from investing in countries considered to be risky. Political risk is a global phenomenon, it is, however, particularly problematic in emerging countries where political institutions do not contain adequate checks on the abuse of government power (Henisz, 2000).

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the Legitimacy Based-View—has recently begun to focus on ways firms can mitigate political risk by building legitimacy in the country in which they operate (Stevens et al., 2016; Kostova & Zaheer, 1999). Legitimacy, according to Suchman (1995, P. 574) is defined as “a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions.”

Research linking legitimacy and political risk has recently begun to emerge. For instance, Gruber and Schlegelmilch (2015), and Marquis and Qian (2014), focus on the issue of corporate social responsibility (CSR) in Africa and China, respectively. They find that by taking action in accordance with government policies, positions, and regulations, firms and their executives maintain their legitimacy in the eyes of the government. In other words, gaining legitimacy in the eyes of the host government and society may be accomplished through sustainability, or CSR practices. Equally important, poor CSR performances could turnout into growing resistance from host society, and probably the government as well, which could affect firm performance and stability.

Stevens and Newenham-Kahindi (2017) further develop the legitimacy based-view approach, and argues that increases or decreases in firms’ legitimacy in the eyes of the host-government and host-society will affect their political risk, such that increased legitimacy will result in decreased risk, and decreased legitimacy will result in increased risk. When JV`s (parent firms`) actions in the local economy are perceived as legitimate and beneficial, it is expected the government will be considerably less motivated to interfere. Conversely, it is expected that a government would be motivated to intervene in the operations of MNEs (JVs) it deems less legitimate. Thus, a JV deemed illegitimate by host-government and society may experience increased scrutiny, pressure and intervention. Gaining legitimacy through the local parent firm that already possesses legitimacy and political connection with officials of the host-government could be an option to mitigate this risk.

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Consequently, it is likely that the interest of the foreign parent firm will reduce. And hence, the foreign parent firm may look for options of removing its assets from the IJV or exiting the country.

To sum up, drawing on the arguments above, the political risk an IJV could face is associated with the IJV`s acceptance by the host country stakeholders such as the government and society. When perceived as more legitimate, firms in an IJV will likely experience less (no) political risk; greater illegitimacy will likely result in more political risk. When the host government or society views the foreign parent firm as legitimate, it is expected that the host government will be less motivated to intervene on the IJV relationship. On the other hand, if the foreign parent firm in an IJV or the joint venture itself is deemed as illegitimate by either the host society or government, it is likely that it will face external pressures. Thus, it is expected that the more a government interferes in an IJV relationship, the more unstable an IJV will be.

2.3.2. Host-country Law unenforceability

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of law unenforceability in a host country increases the incidence of opportunistic behavior by either or both JV parent firms.

Transaction cost economics (TCE) theorists (e.g. Williamson, 1979) claim that opportunism increases when legal ordering is absent. With weak legal protection, a victim of opportunistic conduct has very little legal recourse; this also leads to higher risks and costs because using an internal legal remedy can often cause unanticipated and unwanted consequences. Luo`s study (2007) found that poor regulatory environment affects parent firms in a JV, especially the foreign parent firm`s propensity for risk-taking and commitment.

International JVs operate in emerging countries are often formed in order to share risk and costs, including those associated with laws and politics. If host country`s poor regulatory environment prevents investing parties (the parent firms) from seeing the prospect of reducing such risks and costs, the parent firms are more likely to behave opportunistically. Opportunism, according to Williamson (1985), appears as “adverse selection, moral hazard, shirking, sub-goal pursuit and other forms of strategic behavior”. If a parent firm loses confidence in an IJV`s prospects, it will act more opportunistically and make the other party bear more relational risk (Das & Teng, 1998). Opportunistic behaviors of the parent firms discourage the development of trust, forbearance, and reciprocity; together with goal incongruence in an IJV (Beamish & Banks, 1987). Such behaviors could lead to lower contributions from each partner, which could distract the trust and cooperation between the parent firms.

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2.4. Conceptual model

The literature described above highlights ideas on how a host-country`s political risk and law unenforceability can create IJV instability. The conceptual model derived from the literature is depicted below in figure 1. The arrows shown indicate the relationships. On the left hand side of the model, the independent variables are distinguished. As can be observed, moderated by the MNE – host government relationship, these variables influence an IJV relationship in various ways. The positive (+) signs indicate positive effects, whereas the negative (-) signs indicate negative effects.

(-)

(-,

+

)

(-)

Figure 1. A conceptual model of a host-country political risk and law unenforceability, and

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3. Methodology

This chapter presents the research methodology and the research design. The section below discusses the case study method and the process of case selection. Thereafter, the description of data collection methods and the data analysis will be presented in the final section.

3.1. Case study method

In order to gain a more thorough understanding of how host country politics and legal environment cause IJV instability, I conducted an in-depth case study of two international JV relationships located in a country in East Africa. As theoretical insights into the IJV instability are limited, I chose a case study to gather as detail information as possible in a country in which these effects were expected to be substantial. Eritrea was chosen as context for this study because the country`s institutional environment gives the opportunity to study IJV instability associated with political and legal risks. In so doing, a purposeful sampling methodology was adopted for this research. Moreover, given the (perceived) enormous power and potential influence of mining industry on geopolitical and economic affairs of emerging countries, the study focused on mining industry ventures, an industry in which a high variety of stakeholders are involved.

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3.2. Case selection

The cases were selected based on the following criteria: first, the cases have been chosen on a development basis, focusing on IJVs that are owned by a parent firm from a developed country and a parent firm from an emerging country. The United Nations generally accepted notion of developed and emerging countries is used to categorize the countries of the parent firms of an IJV (United Nations, 1994). In this way, the thesis aims to acquire a representative and rich insight of all the parent firms involved.

Second, the IJVs have to be located in an emerging country, specifically in East Africa. This context is ideal for studying this study`s proposed relationships between political risk and IJV instability, and law unenforceability and IJV instability, for the following two main reasons: a) the region is highly salient for political risk. Despite recent governance improvements in the region, political institutions are still characterized by a lack of constraints on governments’ ability to intervene in the operations of foreign firms (Henisz, 2000). The prevalence of issues such as corruption and civil wars make the political environment highly salient in the region; b) even in spite of these risks, there has been an increase in investment in the region from firms from different regions of the world. Given the increasing scale of MNEs in this region, along with the fact that these firms in have distinct backgrounds and characteristics, it makes this part of the world an ideal context for understanding IJV instability.

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3.3. Data collection

In the course of undertaking the study, different methods of data collection were employed. The main sources of data of this study were interviews and archives. Archives including the highlights of the joint venture contracts, the joint venture`s and the parents` organizational charts and annual reports, published case descriptions, and newspaper and magazine reports about the internal documents and official annual reports were collected and analyzed as a starting point for the interviews. Apart from providing additional information, archival data also made it possible to check the data from the interviews. Thereafter in-depth interviews have been conducted with people who took part in the events studied for example managers and other stakeholders including individuals from the local society. To avoid respondents bias, selecting the right informants who were knowledgeable about the JVs` activities was crucial. I sought to interview informants who could represent all relevant stakeholders. I found a total of ten respondents comprising three respondents from each JV and four informants from the local community.

I conducted the interviews via Skype and telephone-calls. Each interview lasted between 60 and 90 minutes. All the interviews were conducted between April 2017 and May 2017. Some of the interviews were audio-recorded and transcribed verbatim, while some informants wanted to keep their interview confidential. In order to avoid steering the interviewee in a certain direction and subsequently bias the research results, no further information rather than the interview questions with regard to this research was given. The overview of the interviews can be found in appendix A and appendix B on page 37 and 38, respectively.

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3.4. Data analysis

After the data collection, I assembled all the data together. Following Eisenhardt`s (1989) procedures I began the data analysis by writing up descriptions of the institutional setting of the country of operation and background of each JV. To facilitate data analysis and interpretation of this study, all the secondary data and the data from the interviews were chronologically ordered, and examined from the perspective of the theoretical framework of this research discussed in chapter 2. Following this procedure, I started with one case and compared the findings with the theoretical model shown in Figure 1 on page 11. The method adopted in analyzing the cases is analytic induction (Corbin & Strauss, 1990). Analytic induction is a method of extending or refining existing theories by constantly comparing them with crucial instances or typical cases (Corbin & Strauss, 1990).

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4. Findings

Guided by the preliminary conceptual framework, this chapter presents the results found from the qualitative data analysis to answer the research question. In order to give information about the context of the IJV relationship, a brief introduction about the host country and the background of the two cases will be presented. Subsequently, IJV instability that occurred during the life of both IJVs associated with the host country political and legal situations are analyzed. In analyzing the findings, particular emphasis is given to how the independent variables set out in my theoretical framework affected the stability of the JVs. The raw data support and simultaneously contradict the arguments set out in the theoretical framework of the study. Below; I will discuss these results in detail.

4.1. Contextual background - Eritrea

Eritrea is a young and small African country located along the western shore of the Red sea bounded on the north and west by Sudan and on the south by Ethiopia and Djibouti, with a population of around 5 million inhabitants. The Eritrean economy is small and mostly mine, agroindustry and services based. The mining and agricultural sector accounts for most of the national economy. Eritrea qualifies as a multi-religious, multi-ethnic and one-party government. Right from its liberation in 1991 until 1998, Eritrea was an attractive country for foreign investments. Ever since 1998, after a border dispute broke out with a neighboring Ethiopia, the country became unsafe and less attractive for investors. The Eritrean government claims that the threat from Ethiopia, from which Eritrea fought a border war in 1998-2000 is the prime reason that makes investors wary. According to the African Development Bank, Eritrea`s GDP growth was estimated 2.1% in 2015, up from 2% in 2014.

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operate in the country. Despite these challenges, Eritrea`s vast untapped natural resources and geopolitical location also offers unique opportunities to mining multinationals.

Starting 2009 Eritrea has been under a crucial economic and political sanction imposed by United Nations Security Council (UNSC) and faced severe economic and political isolation. However, there are number of MNEs that has been operating in the country for more than a decade and there are also many firms currently entering the country, especially in the mining sector. Consequently, consistent with literature on countries supported by natural wealth extraction, in spite of the fact that the country is isolated the gold money enabled the Eritrean government to maintain its power and gradually improve the country`s economy and institutional structures. This indicates that the economy of the country is largely dependent on revenues from the extraction industry, an industry that is increasingly booming. What is more, the country institutional setting hugely is expected to influence the MNEs that operate in the country which is elaborated below. The section below will present the two cases. First the background of each case is presented. Thereafter I describe and analyze the examples of JV instability resulting from the host country political and legal situations.

4.2. Case 1

4.2.1. Background

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4.2.2. Host-country Political risk and the JV

During the formation of the JV, the host-country was economically and politically stable. The foreign parent firm, however, was unfamiliar with the host-country`s legal, social, and political environment. On the one hand, it had some critical difficulties in predicting the future situations in the country. The fact that the local parent firm is state-owned enabled the foreign parent firm to mitigate some sort of the liability of foreignness. From the perspective of a foreign parent firm, a key concern in IJV is the mitigation of political hazards related to the unpredictability of the rules and regulations of the host-government. Therefore, in order to mitigate any potential political hazard, the foreign parent firm opted to give a 40% share ownership of the JV to the local parent firm.

A year later, a territorial conflict was escalated between the host-country, Eritrea, and a neighboring Ethiopia. As a result, the IJV was very much at risk. The foreign parent firm had then forced to look for either leaving the IJV or ways of safeguarding it. The state-owned local parent firm promised the foreign partner that it would provide all the necessary mechanisms of protecting the IJV so that the JV would be affected by the war. As promised, the host-government took several measures to protect the production site. Amongst others, the government deployed big part of its army that protects the production site. Thus, here it is noticed the fact that the local parent firm was state-owned helped the JV to have access to a favorable governmental protection, and contributed to the stability of the JV.

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challenges, the parent firms continued to strive forward and get the most out of the JV. As one interviewee mentions:

“Although the JV faced many obstacles, the close interaction between the parent firms enabled the JV to remain stable”.

Recently, another major threat which affected the IJV relationship occurred. On March 20, 2015, a terror group led by opponents of the host-government attacked the mine plant. This was a big shock to both parent firms; especially it created a high level of uncertainty to the foreign parent firm. The attack left major negative impacts on the IJV`s operations. Firstly, the machineries which were damaged during the attack had to be repaired. Secondly, in order to ensure the safety of the employees and the entire mining site, additional safeguarding mechanisms, for instance, additional security personnel had to be employed. All this resulted in a huge increase in the operating and monitoring costs of the IJV. On top of that, the foreign parent firm`s stock price was drastically dropped.

Over the next days, the Board of Directors (BOD), which comprises three representatives of the foreign parent firm and two representatives of the local parent firm, conducted an emergency meeting. In their meeting, the representatives of the foreign parent firm found that working closely with the host-government would be a vital source of local information, and thereby the best tool to prevent further threats. The contribution of the host-government was then recognized as a critical asset. As such, the local parent firm had gained power. As one of the interviewees reflected:

“The government of the host-country plays a big role in the stability and success of the JV. It helps us with everything that we need.”

In order to mitigate such risk, the foreign parent firm started to interact with host-government on regular basis. And hence, this interaction cemented the IJV relationship, which enabled the JV, particularly the foreign parent firm, to mitigate political risk and continue earning high profits. As one anonymous of the interviewees pointed out:

“Our relationship with the host-government supported us to reduce uncertainty and

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To sum up, although the unfamiliarity to the host country and the political risk had created uncertainty and liability of foreignness for the foreign parent firm, it did not affect the stability of the JV relationship at stake. The close cooperative relations between the foreign parent firm and the host government played a major role in mitigating security threats and maintaining the stability of the JV.

4.2.3. Host-country Law unenforceability and the JV

For MNEs in a joint venture, strong social and environmental performances record can bring several important benefits, such as better stakeholder relationships and an enhanced overall reputation (Gruber & Schlegelmilch, 2015). This, however, is logical only in developed country contexts. Because of the weak formal regulatory landscape in developing countries (Viswanathan et al., 2014), most MNEs in Africa barely comply with national or international CSR rules and regulations. In line with this argument, at the beginning of Bisha JV, the attitude towards the host-government was fairly skeptical, and both parent firms did not pay much attention to their socio-environmental externalities. One interviewee mentions that “the foreign parent firm was not aware of the fact that it needs

an intimate understanding of the local situations in order to provide benefits for society and the firm itself.”

The CSR literature suggest that local firms have been shown to put less focus on social and environmental related activities, presumably because they are not under scrutiny by conscious western consumers or because they do not have a global brand name and image at stake. And hence, exploiting the weak law enforceability in the African context in general, Eritrea in particular, the foreign parent firm continued to reap the natural resources without considering the social and environmental consequences of the JV. However, increasing public scrutiny, pressured the foreign parent firm and ultimately affected the IJV relationship.

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for the IJV, accompanied by NGOs filed a lawsuit to the Canadian Supreme Court. This conviction targeted the foreign parent firm, alleging that the firm was complicit in the use of forced labor. They claimed that they worked at the mine plant against their will and were subject to “cruel, inhuman and degrading treatment”. They further alleged the firm that they were “forced to work for long hours and lived in constant fear of threats of torture and

intimidation.” This lawsuit was the first in Canada in which claims are based directly on

violations of international law.

Even though the foreign parent firm rejected the allegations as “unfounded” and vigorously defended itself, an investigation led by the United Nations Human Rights Office also reported similar results which support the allegation. Consequently, the foreign parent company was accused of using forcefully conscripted local workers (forced labor) with no payment. As a result, the foreign parent firm`s reputation was damaged. This situation led into high transaction costs (decreased profitability) and created a negative impact on the legitimacy of the JV in general, the legitimacy of the foreign parent firm both in the home and host-country, in particular.

The resistance from the local communities, NGOs, foreign governments pressured the JV to consider its CSR practices. As a result, the host-government started to setup social and environmental regulations and controls the effects of the IJV’s operations on a daily basis. The JV, subsequently, was obliged to setup a CSR and ethics compliance department. The policies adopted by the IJV reflect global standards with regard to safety, human rights, community, environment, and mine closure. As Head of CSR Department explains:

“The CSR department was designed in conformance with the 2006 International Finance

Corporation (IFC) Performance Standards for Social and Environmental Sustainability as applied to non-IFC financed projects in accordance with the Equator Principles”

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“Ethical conduct is a fundamental value for Bisha JV. Non-compliance with the Code of

Ethics is unacceptable with us. The JV adheres to numerous national and international policies of environmental management, health and safety, employee relations, and social

responsibility.”

In sum, this suggests that the host country`s weak law enforceability encouraged the JV to operate irresponsibly. The irresponsible behavior in turn resulted in resistance from the local communities, high transaction costs, and reputation damage. Despite the potential threat of instability, however, by immediately starting CSR practices, the parent firms managed to save the JV relationship. Thus, it could be concluded that the host country law enforceability matters in the stability of a JV. Furthermore, the results show that host government plays a key role in the (in) stability of a JV.

4.3. Case 2

4.3.1. Background

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4.3.2. Host-country political risk and instability of the JV

The causes for instability of this JV were mainly two reasons. Firstly, despite being home to enormous precious natural resources, the mine site where the JV was located was at the center of the host country where large part of the population densely lives. Hence, in order to reduce the ecological footprints of the mining activities on the local society and the natural environment, the parent firms were forced to reallocate part of the production process to a foreign country. This resulted in higher transaction costs. Prior research has shown that firms engaging in social and environmental activities in emerging countries are partly motivated by their aspirations to give back, maintain stakeholder legitimacy and enhance financial performance. While the aspirations to do good, care about the local society and environment, and give back are strong among my interviewees from the JV, the foreign parent firm were expecting to operate with possible minimum operating costs and gain some economic benefits. Thus, it did not accept to operate with the estimated operating costs. The firm was therefore aware of and was unhappy with its due responsibility toward social and environmental issues and overall transaction costs.

Second, the intervention of the host government on the JV relationship gradually weakened the JV relationship and had a vital role the instability of the JV. At the initial phases of the JV, the host government was not aware of the negative consequences of the miming activities. However, over time, with the increase in the IJV`s impacts on the local society and environment, the host government had become more serious in controlling the operations of the IJV and CSR activities. Most importantly, the state-owned local parent firm demanded an increase in its share ownership from 33% at the beginning to 50%. These interventions of the host government over the IJV drastically weakened the level of trust between the parent firm and created big uncertainty about predicting the future situations. On November 2015, the foreign parent firm decided to sell-out its share to a state-owned Chinese firm and left the JV. The managing director of the foreign parent firm described that leaving the IJV was the best option for the foreign parent firm:

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The IJV instability found in this study is in line with prior research investigating IJV instability. Consistent with the extant literature, the findings shows that the intervention of the host government was the primary reason for weakening the relationship between the parent firms which triggered the instability of the JV. When the host government interfered, high tension was developed between the parent firms. As a result, this tension weakened the trust and cooperative relationships between the parent firms which finally led into the break-out of the IJV relationship.

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5. Discussion

Focusing on an emerging country context, this study aimed at providing a better understanding of the effects of host country political risk and law unenforceability on IJV instability. The study draw on several streams of research focusing on IJVs – business strategy, political risk, business ethics literature as well as studies on transaction cost economics – to provide a thorough understanding of the context of IJV instability in emerging countries and East Africa in particular. Against the background of pertinent literature and insights derived from JVs from developed countries, the study conduct a comparative case study of two IJVs established between a firm from developed country and a firm from emerging country to shed light on IJVs operates in emerging countries.

As a result, the findings contribute to the general understanding of IJV instability in emerging countries as well as the question of host country institutional environment an area where research has been specifically called for. While my results show the notion that host country political risk and regulatory effectiveness may result in IJV instability, it also shows that this can be moderated by the cooperative relationship between the foreign parent firm (MNE) and the host government. The results are also in line with previous research that shows that when host country institutions are less effective, business transactions become less certain, resulting in high opportunism and high transaction costs (e.g. Henisz & Zelner, 2004; Williamson, 1985; Kobrin,1979).

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Consistent with Kobrin (1979) this is mainly because of the host government`s intervention on the JV. Since the JV (case 2) was operating in the central region of the country of operation where many people densely live, operating with low ecological footprint and low operating costs became impossible. Over time, not only the government started to set up new environmental regulations, but also demanded an increase in shareholding from 30 per cent to 40 per cent and started controlling the activities of the JV on daily basis. From the perspective of the foreign parent firm, these circumstances made the JV`s future uncertain. Consequently, this pressured the foreign parent firm to withdraw from the IJV relationship. This indicates that host country political and legal settings are critical for IJV stability. However, there is a strong implication that the impacts of political risk are contingent on the behavior of MNEs and their commitment to the local socio-economic development. In line with the legitimacy-based view (e.g. Stevens & Newenhan-Kahindi, 2017; Darendeli& Hill, 2015; Marquis & Qian, 2014), the findings suggest that the more an MNE contributes to the local socio-economic development, the more the host government and society will perceive the MNE as legitimate, the less they will interfere, and the more stable the IJV will be. On top of that, these results contribute to our understanding of the role of governments in shaping a firm’s behavior.

On the other hand, when an MNE does not contribute to the local economic, social and environmental development, the more irresponsible and illegitimate the MNE will be perceived by the host government and society, and the more the host society and government will interfere in the JV which can shake the stability of the JV. Importantly, the findings of the first case clearly shows that collaborative relationships between the foreign parent firm and the host government plays a crucial role in resolving potential parental conflicts and create an atmosphere of trust and collaboration which enables a JV to remain stable. This suggests that attention should be paid to potential partners when selecting JV partners as well as building and fostering cooperative stakeholder relationship during the lifetime of the joint venture.

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strong social and environmental practices can bring a JV several important benefits, such as better stakeholder relationships and an enhanced overall reputation or legitimacy, and thereby strengthens stability of the JV. This suggests that MNEs should integrate corporate social and environmental practices to their strategies and invest in fostering their legitimacy.

6. Conclusions

This study has been one of the first to examine IJV instability in the horn of Africa. Much of the prior academic research focused mainly on IJVs in a developed country context. Yet despite the academic interest, researchers has not sufficiently examined IJV instability in emerging countries. This study has contributed to filling that gap. It contributes to the field of international business by providing insights concerning the impacts of the host country political risk and law unenforceability on the instability of IJVs, an area to which only limited attention has been paid. Using the horn of Africa as a rich context for investigating IJV instability associated with politics and law, the findings substantiate the idea that political risk and poor regulatory environment can trigger IJV instability.

Importantly, this study also has an important message. By building cooperative relationship with the local stakeholders, this study proved that IJVs can overcome the deleterious effects of the host country political and legal risks. The results of the first case shows that by complementing close interaction with the host government the JV have been largely successful in its attempts to build legitimacy, and have succeeded to remain stable for two decades. Further, the results show that one of the studied JV (case 2) failed to secure relations with the host government, and consequently faced interventions from the host government which ultimately led into the end of the JV relationship.

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host country institutional environment. Thus, using these theories enabled the study to investigate IJV instability from different perspectives and contribute to theory.

This study has provided empirical evidence that the pursuit of firm legitimacy through responsible social and environmental performances in general, and especially in the eyes of host society and government, is an effective hedge against potential institutional threats. That suggests that in order to perform well or remain stable, MNEs should be aware of their social and environmental impacts and should contribute to the local developments in which they operate. The study also highlighted the value of an efficient government in minimizing irresponsible firm behavior, and mitigating potential JV instability. Governments should therefore create effective political and legal systems which functions well.

6.1. Managerial recommendations

The study highlights several aspects important to firms or JVs that operate or wish to pursue business in East Africa. First, when entering a JV, firms need to proactively seek and carefully select the right partner with context-specific knowledge. Governments should be taken into account in order to overcome potential challenges accruing due to the informal political landscape and poor regulatory environment encountered in these emerging countries. Second, the attention to legitimacy building through CSR practices in the eyes of the host society and government is likely to be a useful tool against potential threats. The pursuit of firm legitimacy in the eyes of citizens may begin to address, although not resolve, the ethical issues implicit in building political, and sometimes corrupt, ties with autocratic governments. By building social legitimacy, a foreign firm’s dependence on political and/or corrupt ties might be mitigated or at least might be reduced. This could be achieved, for instance, by engaging with social-sector actors and NGOs, in which MNEs may contribute to the improvement of the quality of social, environmental and economic institutions.

6.2. Limitations and avenues for further research

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provided in-depth insights which is useful for theory building and suggestive for practitioners, restricting the study to solely two cases from a single industry operating in a single context limits the possibilities for generalizability to broader populations and questions the external validity of the study. Thus, the findings of this study should be regarded as a basis for further empirical inquiry. It would be interesting if future research could validate the applicability of the conclusions in other industries and under other emerging countries of Africa, South America and Asia. Such a study could provide interesting insights concerning potential differences across emerging countries.

Second, this study has relied on data generated from interviews and archives, and both sources may present difficulties in terms of the reliance that can be placed on the findings. To some extent, the process of qualitative data analysis reflects analytical and interpretative biases inherent in undertaking qualitative research. Even though, these were minimized as far as possible by the adoption of protocols for data collection and analysis, I have to acknowledge that it entails some limitations. To this end, it would be a very interesting avenue for future research to use cross-sectional and longitudinal studies.

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Appendices

Appendix A: Interview questions

1) Do you experience any difference in operating in a developed country, and operating in an emerging country, for instance, Africa?

2) How would explain the leadership style of the joint venture during the initial stages/ first few years of the partnership? Do you notice any changes in the structure management system yet? Is there any involvement by the parent firms or does the joint venture operates autonomously?

3) How would you describe the political situation of the host country, compared to your home country?

4) What was the shareholding of the parent firms during the establishment of the JV? Were there any changes over time?

5) How would describe the trust between the parent firms in the initial phases of the IJV? And did you experience any behavioral change of any of the parent firms over the lifetime of the joint venture?

6) To what extent do you think the economic, political and legal environment affects the activities of your company or the joint venture at large?

7) Would you say that the fact that the host country is continuously alerted with war threats by the neighboring countries, affect the joint venture activities and the IJV relationship? 8) It is clear that the host country is under UN sanction. How does this sanction affect the performance and stability of the JV?

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10) Do you experience any external pressure, for example from the host government or the local communities, with regard to the IJV`s operation influence on the local lives?

11) How do any changes in the political and legal systems influence the joint venture operations and the IJV relationship?

12) Do you find it easy to manage any external pressure? How does the JV management board counteract in case of any legal and political threats?

13) Do any changes introduced in the organizational structure of the JV, for example, changes in partner shareholding affect the IJV relationship?

Appendix B: Overview of interviews

Table 1. Overview of interviews

Joint Venture Parent firms Number of Interviewees Interviewee position Research Period JV 01 Local parent firm ₂ Operations managers April 2017 MNE 1 CSR Vice president May 2017

JV 02 Local parent firm

Unveiling the relationship between MNE`s CSR agendas and the (in)stability of Joint ventures Insights from East Africa