»THE IMPACT OF KNOWLEDGE PROXIMITY AND
INTERDEPENDENCE ON THE GOVERNANCE OF JOINT
VENTURES IN THE HIGH-TECH INDUSTRY«
MASTER THESIS
to obtain the degree of
MSc Business Administration – Strategic Innovation Management at the University of Groningen
June 2020 _____________________ By Annika Kluba S3999467 a.kluba@student.rug.nl Supervisor Marvin Hanisch Co-Assessor Prof. Dr. Jordi Surroca _____________________
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A. Table of Content
1 Abstract ... 1
2 Introduction ... 2
3 International Joint Ventures and Contractual Governance ... 4
4 Hypotheses ... 8
5 Methodology ... 13
6 Results ... 17
7 Discussion and Conclusion ... 22
8 References ... 25
B. List of Tables, Figures and Equations
Table 1 Distribution of Sectors in Data Sample ... 14Table 2 Scope of Authority as seen in CPL-Biologics Joint Venture Contract, 03/2009 ... 14
Table 3 Purpose for Establishment as seen in Zenuity AB Joint Venture Contract, 03/2016 16 Table 4 Trend for Impact of Knowledge Proximity on Scope of Authority (BoD) ... 18
Table 5 Trend for Impact of Interdependence on Scope of Authority (JSC) ... 19
Table 6 Trends for Interaction Effects - Hypotheses 3 (left) and 4 (right) ... 19
Table 7 Descriptive Statistics and Correlations (n= 195) ... 20
Table 8 Multivariate Regression - CMP Framework ... 21
Figure 1 Conceptual Model ... 13
Equation 1 Formula for Knowledge Proximity, retrieved from Jaffe, 1986 ... 15
C. Key Words
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1 Abstract
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2 Introduction
Research on strategic alliances identifies contractual governance of international joint ven-tures (IJV) as an important means to reduce conflicts, stimulate interpartner cooperation, and protect proprietary knowledge (Luo, 2005). With a minimum of two firms entering into an eq-uity alliance, the main objectives comprise the access to foreign, information exchange and reciprocal commitment of resources markets (Nippa & Reuer, 2019). Eventually, their com-mon alliance experience, development of trust and alignment of individual strategies in favor of a common good establish a framework that forestalls the inherent threat of opportunism, knowledge leakage and power asymmetry (Kwok, Sharma, Singh Gaur, & Ueno, 2018; Luo, 2005; Reuer & Devarakonda, 2016). In cases where the former are yet to be established, formal governance mechanisms enable the safeguarding and adaptation of the alliance (Cuypers, Ertug, Reuer, & Bensaou, 2017; Klijn, Reuer, Van den Bosch, & Volberda, 2013).
Contractual governance in particular presents a formalized control and design mechanism for hybrid firms such as joint ventures and is profoundly important as the appropriate choice of governance structure allows to economize on the venture’s transaction costs (Reuer & Devarakonda, 2016). For joint ventures, the authority of decision-making is commonly allo-cated to a board of directors and/or a joint steering committee with their main tasks compris-ing the control and coordination of the venture’s business activities, mutual technology and information exchange (Reuer, Klijn, & Lioukas, 2014; Sampson, 2007). A direct comparison of both forms of governance bodies shows that they tend to differ in their scope of authority and serve differentiated functions: the board of directors primarily exerts control and monitoring functions, whereas the joint steering committee steers or coordinates the processes and exchange of knowledge or appoints subcommittees (Choi & Contractor, 2016; Devarakonda & Reuer, 2018). While the establishment of both, board of directors and joint steering committee, is quite common in joint venture design (Choi & Contractor, 2016; Devarakonda & Reuer, 2018; Kumar & Seth, 1998; Reuer & Devarakonda, 2016), the com-bined analysis of the governance structures is relatively rare in the research fields of strategic alliances.
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between the parent firms are identified as key antecedents that precipitate potential conflicts of interest (Chen & Chen, 2002; Sampson, 2007). Main goal of contractual governance is to abate said potential conflicts of interest and opportunism between the parent firms by instat-ing control and coordination mechanisms. However, it is not clear how the aforementioned antecedents potentially impact the contractual governance and design of joint ventures. That is, how these specific characteristics potentially influence the scope of authority for the re-spective board of directors and joint steering committee. Thus, their impact on the design of joint venture contracts will be evaluated in the following thesis. Hence, the research question is: How do knowledge proximity and interdependence among parent firms of a joint venture impact the scope of power and control for board and joint steering committee, respectively?
The accelerating speed of technological innovation makes the almost immediate value ap-propriation for firms in high-tech industries indispensable. For them, the implementation of collaborative efforts is the most common means for the diversification of knowledge base and immediate market access (Tsang, 2000). In this context, the knowledge proximity between both partners not only enables the transfer of in-depth, complex tacit knowledge but also facilitates the unintended imitation and thus requires control (Kogut, 1988; Sampson, 2007). On the other hand, the interdependence of partners is reflected by the mutual urgency of the alliance which requires information-processing mechanisms and streamlining of communica-tion (Gulati & Singh, 1998; Oxley & Sampson, 2004) which consequently increases the coor-dination cost of the alliance if not properly addressed (Mohr & Spekman, 1994). For both characteristics, the employment of control and coordination mechanisms through the perma-nent establishment of a board of directors and a joint steering committee is an appropriate measure of direction (Gölgeci & Ponomarov, 2015; Kumar & Seth, 1998). The mechanism of control is associated with the monitoring of joint management and strategies (Sampson, 2007) and is thought to be necessitated if parent firms share a high knowledge proximity. Con-versely, the need for coordination is commonly derived from the transfer process of tacit knowledge in joint ventures and is assumed to counteract in case of interfirm interdepend-ence (Oxley & Sampson, 2004; Sampson, 2007). For equity alliances, the execution of control is commonly allocated to the board of directors (Cuypers et al., 2017; Reuer, Klijn, van den Bosch, & Volberda, 2011), while non-equity alliances tend to install joint steering committees for coordination purposes (Devarakonda & Reuer, 2018). Thus, the following thesis aims at examining the interrelation of joint venture governance and parent firm characteristics. That is, it will evaluate whether knowledge proximity accounts for a larger scope of power for board of directors and if the interdependence of parent firms positively influences the scope of power for joint steering committees in a joint venture.
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to expand research about equity alliances by identifying whether specific characteristics of parent firms influence the scope of authority of the board of directors and joint steering com-mittee within joint ventures. Methodologically, this includes the analysis of organizational, re-lational and economic data from 195 joint venture contracts from high-tech industries whose details were categorically evaluated on the basis of an extrinsic framework. To compute the statistic results for the interrelation of two dependent and two independent, a multi-variate regression analysis using the conditional mixed-process framework which is a user-written addition to Stata by Roodman, (2011) was employed. While the regression analysis has not been able to provide significant support for any of the proposed hypotheses, the thesis still contributes valuable insights to the illustration of joint venture contracts and their varying em-phasis on structural components, the importance of firm characteristics as well as interfirm relations.
The following thesis aims to contribute to the research of strategic alliances management and specifically, the design of joint venture contracts. It combines academia on board and joint steering committees in joint ventures (Oxley & Sampson, 2004), two topics that are commonly examined individually, yet not collectively. Through the interrelation of knowledge proximity and interdependence as antecedents of contractual governance decisions with the scope of venture authorities and control, the thesis will potentially rationalize and frame the design of future joint venture contracts. Thus, it expands the current findings on transaction cost eco-nomics which argue in favor of hierarchical organization in order to facilitate information ex-change (Sampson, 2007). Furthermore, it expands the research of Reuer & Devarakonda, (2016) who already investigated antecedents of joint steering committees in the biopharma-ceutical industry and eventually encouraged probing research in other industries.
3 International Joint Ventures and Contractual Governance
Joint ventures are equity linkages and legally created by the means of a contract “where two or more parties create a separate, jointly owned entity” (Pisano, 1989, p. 109) in order to foster organizational learning, access to foreign markets as well as the cooperative specialization and internalization of knowledge (Chalos & O’Connor, 2004; Hennart & Zeng, 2005). One of the most prominent purposes is the opportunity of knowledge exchange, be it for reasons of common research and development or access to markets and the firm’s respective resources, technologies or strategic networks (Oxley, 1999; Oxley & Sampson, 2004). The latter is especially true for industries with significant access barriers to and swift obsolescence of technologies. Here, the benefits of sharing of resources and knowledge as well as the incorporation of complementary assets clearly outweigh the share of profits and potential risks resulting from collaboration (Perks & Jeffery, 2006).
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(Foss, 1997; Oxley, 1999). Said opportunism commonly originates in power asymmetries among the parent firms (Corsaro, Cantù, & Tunisini, 2012), their variances in technological knowledge and innovation potential as well as a stark divergence of financial, market and network strength (Yamanoi & Cao, 2014; Yang, Zheng, & Zhao, 2014). Although the risk of opportunistic behavior and exploitation of technological knowledge are particularly high for smaller firms with homogeneous innovation portfolios, they are still willing to enter into innovative partnerships or joint ventures as they are likely to gain more than larger firms (Nieto & Santamaría, 2010; Pérez & Fierro, 2018). That is because regardless of size, financial and technological prowess or organizational structure, joint ventures offer firms the opportunity to acquire and adopt another firms’ knowledge whilst holding joint ownership and mutual commitment and control of resources (Kogut, 1988).
According to transaction cost economics (TCE) which can be identified as part of organizational economics, the reasons why to enter into a joint venture and how to successfully manage it are strongly interlinked (Nippa, Beechler, & Klossek, 2007). The theory favors hierarchical governance modes such as joint ventures in cases of high transaction and knowledge transfer costs which is why said partnership structure is highly preferred in the high-tech industries (Choi & Contractor, 2016). Its main behavioral assumptions consist of opportunism and bounded rationality among partnering firms that potentially intrude the successful maintenance of a partnership (Williamson, 1991). Thus, it is adamant for the participating firms to intercept the potential risks of asymmetric power imbalances in the joint venture in order to avoid permanent damages or premature failure and abolishment of the cooperation. To prevent premature termination, common design mechanisms consisting of technology portfolio diversification, creation of interdependence as well as the development of “coopetitive capabilities that include adaptive learning, selection mechanisms, imitative processes, and other capabilities” (Baglieri, Carfì, & Dagnino, 2016, p. 180) are adopted. Here, the main rationale is that complex contracts will always be “unavoidably incomplete because of bounded rationality and hence are subject to hazards of opportunism” (Tsang, 2000, p. 217). For cases in which interpersonal relationships have already been established between firms, this can be compressed through relational governance (relational exchange theory). Said mechanism involves “flexibility, information exchange, participation in decision making, and conflicts and problem solving through consultations” (Xue, Yuan, & Shi, 2017, p. 2) and acts as a means to build trust between parties and reduce the reliance on contractual safeguards. Yet, in cases where interpartner relations have yet to be formed or when monitoring and control is highly necessitated in order to mitigate opportunism and incentivize knowledge exchange, contractual specification is highly beneficial (Sampson, 2007).
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is set upon governance itself as means of protection. The ex-ante allocation of authority within contracts (contractual governance) not just allows an elaborate design and structure of the intended joint venture before its actual enforcement; it also enables the parent firms to establish the foundations for solutions of foreseeable conflicts without knowing the “precise nature of the contingencies or required adjustments” (Reuer & Devarakonda, 2016, p. 512).
With TCE taking into account the asset specificity and potential complementarity of the engaged parties, as well as the uncertainty and recurrent frequency of their transactions, the theory accounts governance as critical to harmonize the relationship, “effect adaptability and promote continuity” in order to realize the economic value of the venture (Williamson, 1975, 1985, p. 30). The usage of contractual governance thus serves the purpose of protecting against opportunism, freeriding, unintended knowledge leakage and moral dilemmas (Inkpen, Minbaeva, & Tsang, 2019; Luo, 2005) and concurrently fosters knowledge exchange and cooperation, especially in equity joint ventures (Sampson, 2007; Williamson, 1991).
For this reason, the understanding of the interrelation of formal and relational governance mechanisms with transactional attributes of the firms and their individual relationships could provide future information on the significance of complementarity, formation and governance of joint ventures through control and coordination elements as well as the avoidance of appropriability hazards (Nippa & Reuer, 2019; Teece, 1986). With the design of joint ventures in the high-tech industry as the principal topic, the use of hierarchical organization and their governance characteristics build the foundation for the given thesis. The latter enable and augment monitoring and control of a joint venture’s activity. They therefore function not just as a control mechanism against opportunism but also foster efficient knowledge exchange among participating firms (Sampson, 2007).
One of the most prominent approaches for the monitoring, supervision and enforcement of contractual governance is the installment of a board of directors and/or joint steering committees with the intention of delegation of power, size and responsibilities within the joint venture (Jiang & Li, 2009; Reuer & Devarakonda, 2016).
“The Board of Directors of the Company shall set up an executive committee (the “Executive Committee’’) which shall be in charge of the day-to-day operation and management of the Company. The Executive Committee shall have one General Manager, one Standing Deputy General Manager and one additional nominee from Party A and one additional nominee from Party B. The specific powers of the members of the Executive Committee shall be determined by the Board of Directors.”
JV contract between Shanghai Yanfeng Automotive Trim Company, Ltd. and Johnson Controls International, Inc., 22 Oct 1997
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While the mechanism of control refers to the monitoring of joint management and activities (Sampson, 2007), the need for coordination is derived from the transfer of tacit knowledge among firms and units of the joint ventures (Oxley & Sampson, 2004; Sampson, 2007). For the aforementioned reasons, the installation of a board of directors serves a multitude of com-plex functions. It especially provides a control function and thus enables the maintenance of a high degree of managerial independence (Cuypers et al., 2017; Nguyen, Larimo, & Wang, 2019). That is, boards often function as negotiation and information gathering platforms, organizational control bodies that transmit advice, facilitate relations with external stakeholder or surveil the strategic planning of the venture (Cuypers et al., 2017; Klijn et al., 2013). By these means, the excision of participating firms’ rights, monitoring of assets as well as the knowledge exchange between partners can be highly facilitated and conversely reduce the risk of ex post harzards such as opportunism (Reuer et al., 2011).
“[..]The Board shall have full, complete and exclusive authority, power and discretion to manage and control the business, property and affairs of the Company, to make all decisions regarding those matters and to perform or cause to be performed any and all other acts or activities customary or
in-cident to the management of the Company's business, property and affairs.”
JV contract between Techniclone Corporation and Oxigene, Inc., 11 May 2000
On the other hand, joint steering committees are often board-like control bodies that are provided with specific administrative controls and coordination powers (Reuer & Devarakonda, 2016).
“The program, operations, and business of the Joint Venture shall be administered by the Manage-ment Committee as provided herein and in the Operating AgreeManage-ment,[…]”
JV contract between Hoechst Marion Roussel, Inc. and ARIAD Pharmaceuticals, Inc., 04 March 1997
Especially in the fields of technology, the continuous specialization and specificity of knowledge requires the coordination of business activities. Due to globalization and digitalization, said knowledge is often globally scattered among a variety of institutions, departments or subsidiaries (Nippa & Reuer, 2019). Further, the need to align corporate identities and shared visions in order to create the joint venture’s ‘macroculture’ as well as consistent progress review makes the organization of coordination mechanisms pivotal (de Man & Roijakkers, 2009). The corresponding installation of joint steering committees enables firms to attend to aforementioned needs and follow an even more streamlined interaction of researchers or employees. It also allows the formulation of specific rules of engagement and interaction among participating associates whilst using the governance of social interaction to prevent knowledge leakage (Devarakonda & Reuer, 2018; Liebeskind, 1997).
If both forms of governance mechanisms are implemented (see Yanfeng/Johnson Controls
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“[…] the Steering Committee shall promptly and in good faith work to resolve the issues causing such material and demonstrable negative impact to allow AV to resume such activities in a timely manner while eliminating such negative impact to the Company’s business.”
Non-Compete Clause, JV contract between SoftBank Corp. and AeroVironment, Inc, 01 Dec 2017
Conversely, the “Board Reserved Matters” listed in section 4.4.c of the SoftBank/AeroViron-ment contract include the board’s decision rights regarding the company amendSoftBank/AeroViron-ments, reor-ganization, mergers, reclassifications, establishment of subsidiaries or board-related speci-ficities. This example reflects the strategic, superior and controlling authority of the board in contrast to the coordinative, mediating role of the joint steering committee in a joint venture that implements both governance mechanisms.
In this context, it is not yet investigated how and if the respective firm characteristics potentially impact the success of the venture. As contracts are likely to remain incomplete for the duration of their enforcement (Tsang, 2000), contractual governance and consequent design of the joint venture provide a direct corrective through the commitment and control of organizational bodies such as boards and/or committees. Yet at the same time, this close interaction could also bear a risk for the ventures as well as the respective firms’ success in the long run. With firms potentially exposing tacit knowledge - especially when being similar or proving an overlap in technological expertise – or losing proprietary information in the process of collaboration (Liebeskind, 1997; Reuer & Devarakonda, 2016), contractual governance must be given. However, the adaptation of the scope of authority of the respective supervisory body to the needs of the venture and its interrelation to the characteristics of the participating firms have not yet been part of intrinsic research.
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Hypotheses
Control of the joint venture as a whole is necessary due to the shared nature of alliance gov-ernance (Das & Teng, 2003) and entails the monitoring of joint management and activities (Sampson, 2007). It is influenced by the trade-off between “the parent’s need to control the JV’s operations and the JV’s need for autonomy” (Kumar & Seth, 1998, p. 580). This can be interpreted as administrative control executed by the joint venture as an autonomous entity, as seen in Reuer & Devarakonda, (2016) or management control deriving from the respective parent company (Yan & Gray, 1994). According to Williamson, (1991) administrative control and incentives are the main dimensions of governance for equity collaborations such as joint ventures. However, it is “difficult to disentangle the determinants and implications of these underlying dimensions of governance” (Reuer et al., 2014, p. 1639). Thus, by examining an-tecedents such as knowledge proximity and interdependence and relating them to the scope of authority for governance bodies, it is possible to investigate contractual governance as a protection mechanism and mean to design joint ventures.
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Second, contracts enumerate specificities of the authority, establishment and perpetuation of the joint venture, its governance and operations (Reuer & Devarakonda, 2016). Taking into account the incompleteness of contractual agreements, the right to control decisions in order to deal with potential contingencies is adamant (Pisano, 1989). In the context of joint ventures, “control refers to the process by which one entity influences, to varying degrees, the behavior and output of another entity through the use of power, authority, and a wide range of bureau-cratic, cultural, or informal mechanisms” (Geringer & Hebert, 1989, p. 236f.). Not only is the result of greater control a more confident contribution of both parent firms’ knowledge-based capabilities to the joint venture (Sampson, 2007). It also serves as a “safeguard against ex-change hazards and opportunistic behavior in collaborative agreements” (Reuer et al., 2014, p. 1639).
On the other hand, coordination, as another mechanism within the governance structure, is related to the activities surrounding the transfer of tacit knowledge in joint ventures (Oxley & Sampson, 2004; Sampson, 2007) and is needed to overcome organizational and geograph-ical boundaries (Rothaermel & Deeds, 2004). According to Poppo, Zhou, & Ryu, (2008) co-ordination can be seen as the processes and routines between the parent firms that allow the collaboration of activities which is eventually facilitated through the development of common trust (Pisano, 1989). In order to ensure the corresponding increases in information-processing capacity (Kumar & Seth, 1998), joint ventures call for the establishment of coordination and control mechanisms. The corresponding governance bodies assigned to the control and co-ordination of said activities are the board of directors and/or the joint steering committee of the equity alliance (Devarakonda & Reuer, 2018; Kumar & Seth, 1998).
As seen in the joint venture contract excerpt above, the nature and governance structure of a company and its supervisory bodies can be highly customized by means of contractual framework. In the context of distribution of control and coordination, parent firms are advised to control their joint ventures through a board of directors (Cuypers et al., 2017; Reuer et al., 2011). However, intensive collaboration not only requires control but also necessitates close communication and coordination, especially in integrated alliance modes such as joint ven-tures (Choi & Contractor, 2016). For reasons of coordination, firms will commonly resort to the additional establishment of a joint steering committee. Notwithstanding the diversity in naming options (e.g. steering committee, managing committee, executive committee), the main in-tention of impeding opportunism, moral hazards and misappropriation, as well as the need for coordination is a common denominator for the design of joint ventures and their respective contractual governance (Devarakonda & Reuer, 2018).
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property, scope of business activities, mergers and acquisitions, legal action as well as op-erations of the respective joint venture but excludes sole participation rights of the govern-ance body. An empirical analysis of the aforementioned interrelation is relevant for two rea-sons: First, empirical efforts on the interdependence of transactional characteristics and gov-ernance have been rarely conducted (Luo, 2005; Oxley, 1999). Second, the observation of specific characteristics and their impact on contractual governance is interesting as, if signif-icant, it will allow the consideration of said factors within the design of future joint ventures (Oxley & Sampson, 2004). It is thus proposed that contractual governance of joint ventures will differentiate depending on the characteristics of the respective parent firms and their in-terrelation.
Knowledge proximity relates to the similarity in knowledge and technological capabilities be-tween parent firms of the joint venture (Cohen & Levinthal, 1989; Sampson, 2007). Collabo-rating with a direct competitor allows to “acquire new technological knowledge and skills from the partner(s), but also to create and access other capabilities, based on the intensive ex-ploitation of existing capabilities”, especially in knowledge intensive, complex and dynamic industries and environments (Baglieri et al., 2016, p. 182). That is, firms not only resemble each other in functional diversity and technological backgrounds but also show a substantial overlap between patents (Sampson, 2007). Since joint ventures are founded with the purpose of common research, among other things, the line between mutual learning and unintentional knowledge leakage is fine and requires protective measures to perpetuate the ventures ex-istence (Jiang & Li, 2009). Firms typically enter into a joint venture with firms that carry dis-tinctly complementary assets and capabilities in order to allow for a steep learning and inno-vation curve as well as an extensive knowledge exchange (Dutta & Weiss, 1997; James, Leiblein, & Lu, 2013). However, entering into alliances with firms that are similar in technolog-ical function and knowledge can augment the in-depth exploitation of highly specific intellec-tual assets. In accordance with the paradox of openness, the high risk of opportunism and imitation among parent firms in close knowledge proximity or with a high technology overlap requires the strict integration of control mechanisms in joint ventures (Laursen & Salter, 2014; Sampson, 2007). According to Sampson (2007), the additional safeguarding of greater con-trol measures incentivizes firms to a more confident contribution of their knowledge-based capabilities to alliance activities. That is why parent firms are advised to use contractual gov-ernance as a means to set-up control mechanisms in the form of a board of directors in order to foster the continuity of their joint venture (Cuypers et al., 2017; Reuer et al., 2011). The board’s control over the joint venture increases proportionately to its designated scope of authority. In line with the argument that knowledge proximity requires control more than coor-dination, it is hypothesized that it proportionately increases the scope of authority of the board of directors in joint ventures. That is, the higher the knowledge proximity between the parent firms, the greater will be the scope of decision-making authority for the board of directors.
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Interdependence between different units of an organization can be described as the ‘input-output relationship’ and is rooted in the parent firms’ perceived mutual urgency for the specific partnership, their valuation of the respective other’s contribution of resources, knowledge, and skills (Smith & Barclay, 1999; Thompson, 1967). Hence, it appreciates in relation to the extent of founding purposes as stipulated in the joint venture contract. Research often cate-gorizes it as pooled (activities discrete and without direct input-output relationship), sequen-tial (one’s output is the other unit’s input of an activity) and reciprocal (mutual relation of ac-tivities that makes interactions necessary) interdependence (Thompson, 1967). Other schol-ars, such as Kumar & Seth, (1998) account the sharing of important resources in favor of the venture’s success as an auxiliary to increase the strategic interdependence between venture and its parents. According to contingency theory which acts as an addition to the transaction cost theory, it also reclaims a high need of control and coordination (Kumar & Seth, 1998). It is also referred to as a challenge that causes coordination costs, meaning that the greater the interdependence of both parent firms and their activities as organizational units to the joint venture, the greater the need for information-processing mechanisms and streamlining of communication (Gulati & Singh, 1998; Oxley & Sampson, 2004). This requires hierarchical supervision in the form of governance structures in order to provide improved task allocation as well as to mitigate the barriers of communication, decision making, knowledge transfer and coordination between the parent firms (Choi & Contractor, 2016; Gulati & Singh, 1998; Parkhe, 1993; Reuer & Devarakonda, 2016).
Consequently, the need for coordination for interdependent parent firms of a joint venture would be higher. While the control function is commonly associated with the board of directors, the coordination function is bestowed upon the joint steering committee in cases where both bodies of authority are in place (Choi & Contractor, 2016; Reuer & Devarakonda, 2016). In line with the argument that interdependence requires coordination more than control, it is hypothesized that interdependence proportionately increases the scope of authority of the joint steering committee in joint ventures. As the extent of needed coordination within the joint venture increases, it will be reflected in an increase in the scope of authority of the joint steer-ing committee. That is, the higher the interdependence between the parent firms, the greater will be the scope of decision-making authority for the joint steering committee. Thus, it is likely that with interdependence primarily requiring coordination, the interdependence of parent firms will directly impact the scope of authority for the joint steering committee, if installed.
Hypothesis 2: Interdependence is positively related to the scope of authority for the joint venture’s joint steering committee.
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firms. The latter is especially true for firms with high knowledge proximity (Laursen & Salter, 2014; Sampson, 2007). In accordance with the preceded hypothesis, firms with high knowledge proximity require an intensification of control mechanisms to counteract the immi-nent threat to the firms. Under the circumstances of high urgency, or increasing interdepend-ence, the risk of opportunism would thus increase even further for firms that require control over coordination already. That is, interdependence could have an enhancing effect on the interrelation of knowledge proximity and the respective scope of authority of the joint venture’s board of directors as a controlling governance mechanism. Therefore, the interaction of inter-dependence and knowledge proximity is to be tested as it is hypothesized that interdepend-ence will intensify the necessity of control governance mechanisms.
Hypothesis 3: The positive relationship between knowledge proximity and scope of authority for the joint venture’s board of directors will be strengthened by higher levels of interdependence.
On the other hand, joint ventures whose parent firms show a high knowledge proximity com-monly collaborate on an in-depth, highly specific knowledge level which magnifies the contact points between the parent firms. (Laursen & Salter, 2014). While this fosters the risks of op-portunism and knowledge leakage it also lays the foundation for redundancy and hampering of value creation in high-paced industries with short technology life-cycles (Schildt, Keil, & Maula, 2012; Wassmer, 2010). Especially for joint ventures whose parent firms show a similar mutual urgency to enter into the alliance (interdependence) the mitigation of said risks would be indispensable. In those cases, the expansion of communication and coordination safe-guards such as joint steering committees would enable firms to take full advantage of their investment, increase the knowledge exchange and innovativeness and thus abate the afore-mentioned risk that correlates with knowledge proximity (Devarakonda & Reuer, 2018; Gulati & Singh, 1998; Nguyen et al., 2019). That is, the authority for joint steering committees poten-tially distends with parent firms who reveal strong interdependence as well as close knowledge proximity. In other words, knowledge proximity could have an enhancing effect on the interrelation of interdependence and the scope of authority of the joint steering com-mittee as a coordination governance mechanism.
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The following conceptual model depicts the hypotheses of this thesis.
5 Methodology
The sample comprises data from 195 evaluated joint venture contracts established in high-tech industries. Main reasons to test the hypotheses in this empirical setting are the frequent establishment of alliances, especially in form of joint ventures in the high-tech industries (Deloitte, 2010) to adapt to technological complexity and change although it provides a high risk for opportunism, knowledge leakage as well as task and coordination uncertainties. Fur-thermore, data is easily traceable due to the large number of public companies in these in-dustries (Keil, Maula, Schildt, & Zahra, 2008; Reuer & Devarakonda, 2016)
Sources for the data collection were international and academic databases such as Lex-isNexis and LawInsider, search engines as well as company websites1. Here, the
differentia-tion of industries as high-tech was necessary to refine the search process of joint ventures that are based within the sectors and involved a two-step process: first, the identification of adequate high-tech and stable-tech (long horizon) industries from Table 1A of Hall & Vopel, (1997) in order to extend prior research within the biotechnological and pharmaceutical in-dustry (Reuer & Devarakonda, 2016). The applicable SIC codes, which are used to segment firms by industries (Kile & Phillips, 2009), were then utilized for the identification of firms whose filings are registered with the US-American Securities and Exchange Commission (SEC) 2.
SEC filings not only provide information on the contract data regarding both, parent firms and joint ventures, but also hold registered information on previous contracts and potential amendments between the parties (Susarla, 2012). The determination of a variety of industries and companies as “high-tech” was followed by the extraction of joint venture contracts within said industries as assigned by the identified SIC codes
Due to the difficulty of retracing full joint venture contracts, the original research focus on a single sector has been broadened to contracts from various sectors that account as
high-1 Most frequently utilized key words: joint venture, bilateral, contract, technology, high-tech, semicon-ductor, automotive, solar, board of directors, joint steering committee, SEC, engineering.
2 The majority of parent firms are located in industries marked with the following SIC codes: 3571| 3751 |3533 | 3510 | 3721 | 3674 | 3711 | 3714 | 3576.
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tech industries. Further, the potential year of joint venture establishment was lowered to 1986. Ultimately, the dataset contained 356 joint venture contracts. With deduction of duplicates, multilateral as well as insufficient contracts, the analyzed dataset comprised 195 joint venture contracts. The majority of joint venture contracts are based in the healthcare sector (134), followed by automotive (23) and semiconductor engineering (10), see Table 1. For the data analysis, the extracted contract information was extended by means of press releases and trade reports from publicly available databases such as Dow Jones Interactions, Bloomberg or Factiva as well as from firm websites directly.
Table 1 Distribution of Sectors in Data Sample
Dependent variables. As elaborated above, joint ventures commonly install board of directors and/or joint steering committees as supervisory bodies. The main focus of the following anal-ysis is to examine the influence of key antecedents on the scope of authority. That is, an indicator whether contractual governance includes board and/or joint steering committees as well as how much managerial duty and control or coordination the respective body carries. In order to determine the range of decision-making rights of the respective body it was ada-mant to dissect the contractual governance specifications by type and degree of decision right, see Table 23 .
Table 2 Scope of Authority as seen in CPL-Biologics Joint Venture Contract, 03/2009
For reasons of simplification for the following regression, only full decision rights per govern-ance body were taken into account and added to a sum. Said sum of decision rights of the board of directors and joint steering committee as determined per joint venture contract then functioned as observation for the dependent variables ‘scope of authority of the board of directors’ and ‘scope of authority of the joint steering committee’, respectively. Altogether, a total of 195 contracts held board of directors and/or joint steering committee observations,
3 ‘0’ depicts the absolute lack of decision or participation rights, ‘1’ displays participation and ‘2’ marks full decision rights.
Sector Freq. Percent Cumulation Automotive Manufacturing 23 11.79 11.79 Electronics Manufacturing 7 3.59 15.38
Energy and Power 2 1.03 16.41
Financial Services 2 1.03 17.44 Healthcare 134 68.72 86.15 Industrial Goods 1 0.51 86.67 Materials 2 1.03 87.69 Retail 5 2.56 90.26 Semiconductor Manufacturing 10 5.13 95.38 Services 2 1.03 96.41 Solar Technology 7 3.59 100.00 Total 195 100.00
Finance IP Business Scope M&A Legal Operations
BoD 2 2 2 2 2 2
JSC 1 0 0 1 0 1
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were correctly recorded and thus qualified to be employed for the analysis. A glimpse at the mean, see Table 7 indicates that board of directors tend to be more abundant within the analyzed dataset.
Independent variables. The given thesis utilizes knowledge proximity and interdependence among parent firms of a joint venture as independent variables.
The variable ‘knowledge proximity ‘incorporates the measure of proximity of firms as seen in Jaffe, (1986) and Sampson, (2007) which captures the technological and thus knowledge position of the respective parent firms. The technological diversity or conversely the close-ness of firms will be captured by the characteristic of interest. For this, it is necessary to determine the diversity of the technological portfolios of the respective firms by count of filed patents within patent technology classes and by years (Sampson, 2007). The use of a multi-dimensional vector, F! = (F!"…F!#), in which F!# = patents captures the accumulated patents of the specific firm i in patent class s allows the measurement of the diversity of portfolio. Sub-sequently, knowledge proximity can be measured using the formula from Jaffe, (1986), see Equation 1 given that i ≠ j.
Knowledge proximity =
By means of the computed variable of interest, the unity of firms (1) is measured by identical position vectors, whereas firms with orthogonal vectors have zero (0) proximity. That is, the closer to unity the variable of interest, the greater the overlap in research interest and conse-quently the knowledge proximity of the two firms (Jaffe, 1986). It is to be noted, that while a positive relationship between knowledge proximity and scope of authority for the board of director as controlling body is expected, its calculation meets two critical limitations: it is based upon a small dataset of joint venture contracts and merely includes international patent classifications of patents filed with the US Patent and Trademark Office.
The variable ‘interdependence’ describes the parent firms’ perceived mutual urgency for the specific partnership (Smith & Barclay, 1999). The operationalization of the variable frequently incorporates the specific classification on the basis of Thompson, (1967) and measures the respective reciprocal or sequential interdependence of the alliance, (Choi & Contractor, 2016; Gulati & Singh, 1998; Reuer & Devarakonda, 2016). Another option according to Luo, (2005) would be to test interpartner dependencies by resource, (also Chen & Chen, 2002), collabo-ration and solution interdependence. However, in accordance with the perception of interde-pendence as mutual urgency, this thesis will try to ream the quantification of interdeinterde-pendence by utilizing the purpose of the joint venture as a means to measure the independent variable. That is, the higher the aggregation of purpose as stipulated in the joint venture contract, the higher the points of contacts, exchange and mutual necessity between the parents are likely.
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Consequently, the higher the purpose for both parent companies to establish the joint venture, the higher their interdependence.
Table 3 Purpose for Establishment as seen in Zenuity AB Joint Venture Contract, 03/2016
For this analysis, it is presumed that the sum of purposes4 as determined in the respective
joint venture contract reflects the degree of interdependence between both companies. The extract in Table 3 shows that the parent firms of the Zenuity joint venture share an interde-pendence of 5 (of 7) according to the standards of this thesis.
Control variables. The inclusion of control variables is necessary to enable a more thorough conclusion from the computed results and eradicate potential errors (Bono & McNamara, 2011). Antecedents indicative of closeness between parent firms of a joint venture are ex-pected to also function as moderators to the one-way relationship between interdependence and knowledge proximity and contractual governance.
For the evaluation of interfirm trust that could originate from prior alliance experience between the parent firms (Gulati, 1995) and thus have an impact on governance structures and oper-ationalization of control (de Man & Roijakkers, 2009), the inclusion of the control variable ‘Prior Ties’ is adamant. The large majority of the here analyzed joint ventures are located in the automotive and healthcare sector. Thus, the inclusion of the control variables ‘Automotive Sector’ and ‘Healthcare Sector’ allows for the compensation of large sector overlap and its consequent knowledge and patent overlap within the data set. The complexity of the contract can account as a governance mechanism as well. An elaborate contract incorporating high precautions and safeguards aims at extenuating ex-post hazards. Therefore, the control var-iable ‘contract length’ measured by the word amount of the contracts will be added (Reuer & Devarakonda, 2016). This thesis examines contractual governance as a means to control and coordinate a joint venture. As the scope of authority, elaborateness of contract and intensity of immediate communication regarding the management of the joint venture appear to be interrelated, it is necessary to include ‘annual meetings’ as a control variable5. Lastly, the
utilization of joint ventures as firm structures, the configuration of contractual governance as well as the social embeddedness and purpose of a joint venture is likely to differ greatly de-pending on the date of formation (Luo, 2002, 2005). Thus, the segmentation of contracts by ‘Contract Date6 allows to compensate for the variations.
4 The binary determination of joint venture purpose differentiates between 0 – not given in contract and 1 – given in joint venture contract. Particularly, it measures the intent of market access, access to resources, common R&D, design and manufacturing, marketing as well as the creation of a shared service by means of the joint venture.
5 For this, the number of meetings as noted in the data analysis was translated to a binary count, 0 representing less than two meetings a year, 1 referring to more than bi-annual meetings as well as ad-hoc assemblies.
6 Per creation of year dummys and segmentation of contract dates into four time periods (1981-1990; 1991-2000; 2001-2010; 2011-2020).
Market Access Resources R&D Design Manufacture Marketing Shared Service
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6 Results
This analysis aims to estimate the impact of antecedent characteristics of parent firms on the scope of authority of the governance bodies of joint ventures. That is, the impact of knowledge proximity and interdependence on the scope of authority for the board of directors and joint steering committee of joint ventures, respectively. As the conceptual model evolves around two dependent and two independent variables, the recourse to an ordinary linear regression analysis would not fully support the objective. The CMP, or conditional-mixed process model, framework allows the analysis of seemingly unrelated regression with diverse equations and measures. Thus, it is especially fitting for structural equations such as the alternations in esti-mates of governance structures. The latter being ordered dependent variables, the estimate is achieved by ordered probit (Roodman, 2011).
Descriptive statistics can be seen in Table 7. Of the 195 alliances given in the analyzed da-taset, 75% utilize board of directors whereas 34% install joint steering committees. Both gov-ernance mechanisms are not exclusive but often times complementary to each other as men-tioned above. Following the standardization of non-binary independent variables and rela-tively low correlation coefficients, the absence of a multicollinearity threat can be assumed.
Table 8 depicts the results of a multi-variate regression analysis using the conditional mixed-process framework which is a user-written addition to Stata by David Roodman (2011). It includes three models measuring the particular impact of two independent variables – knowledge proximity and interdependence – on the scope of authority of the respective ven-tures’ board of directors and joint steering committee. Model 1 includes control variables and a prob>chi2 of less than 0.01. The latter is also measured for Model 2 which further incorpo-rates the independent variables as well as for Model 3 with the additional moderation effect. According to the results under Model 3, there is a trend that knowledge proximity could have a slightly positive impact on the scope of authority for the board of directors (coefficient of Knowledge Proximity = 0.14). In other words, it would be likely that with increasing knowledge proximity the decision-making rights for the board of directors of a joint venture would expand. However, the coefficient is not significant. This indicates that the scope of authority for a board of directors depends on characteristics, measures or structures other than knowledge prox-imity. Thus, Hypothesis 1 cannot be confirmed.
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data could not provide evidence in favor of a positive interaction effect and thus the Hypoth-esis cannot be supported. HypothHypoth-esis 4 suggested a positive interaction effect between knowledge proximity and interdependence, yet, the results are insignificant as well. Hypoth-esis 4 cannot be significantly supported.
A prevalent observation throughout all three models of the regression is a relatively high standard error (f.e. Knowledge Proximity: Model 2, std.err. = 0.08, Model 3, std. err. = 0.09). This could derive from the highly individualized character of business structures and con-tracts, reflecting the freedom of contract that is imminent to international corporate law. With the data collection choosing from a limited sample and analyzing on the basis of a restricted framework, the inability to find significant results is likely caused by strong deviations from a common mean of findings.
Findings on the control variables however indicate that although antecedent characteristics such as knowledge proximity and interdependence among parent firms do not seem to have a significant impact on the governance structures of the joint ventures, so do indicators of precaution, trust and consistency. For prior ties, a significant negative relationship with the scope of authority of the board of directors can be found in all three regression models(-0.024, -0.026 and -0.028). Similarly, the number of annual meetings and the scope of authority of board of directors show a significant negative relationship in the analyzed data sample. Lastly, contract length appears to have a significant negative relation to the scope of authority of both, board of directors and joint steering committee. The latter must be cautiously consid-ered as they are only significant under the presumption of a standard error p<0.1.
Table 4 Trend for Impact of Knowledge Proximity on Scope of Authority (BoD)
Table 47 plots the results of the regression
analysis for the relationship between knowledge proximity and the scope of au-thority of the board of directors (H1). Its results are based on data from 195 joint venture contracts from high-tech indus-tries and, although not significantly proven, indicates a positive trend. Ac-cordingly, the scope of authority appears to increase the higher the knowledge proximity between the parent firms alt-hough not significantly confirmed.
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Table 5 Trend for Impact of Interdependence on Scope of Authority (JSC)
Table 5 depicts the results of the regres-sion analysis regarding the relationship between interdependence of parent firms and the scope of authority of the joint steering committee (H2). Here too, the sample size comprises 195 joint venture contracts from high-tech indus-tries. Despite its lack of significance, a miniscule positive trend can be as-sumed.
The graphs in Table 6 also depict the results of the regression analysis for Hypotheses 3 and 4. Interestingly, the results for the interaction effect of interdependence and knowledge proximity on the authority of joint steering committees show a slight negative trend and would thus contradict the proposed idea of Hypothesis 3. This potentially reflects the understanding of the diversity of control: formal control mechanisms can lead to a negative impact on the flexibility and creativity of the firm while social control mechanisms are likely to increase knowledge exchange, innovativeness and business activities (Nguyen et al., 2019).
Table 6 Trends for Interaction Effects - Hypotheses 3 (left) and 4 (right)
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Table 7 Descriptive Statistics and Correlations (n= 195)
Variables Mean S.D. Min Max (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15)
1 Scope of Auth. BoD 2.74 2.48 0.00 6.00 1.00
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Table 8 Multivariate Regression - CMP Framework
Variables Scope of Auth. BoD Scope of Auth. JSC Scope of Auth. BoD Scope of Auth. JSC Scope of Auth. BoD Scope of Auth. JSC
Healthcare Sector -0.27 0.49 -0.25 0.49 -0.27 0.50 (0.21) (0.37) (0.22) (0.37) (0.22) (0.37) Automotive Sector -0.27 0.32 -0.24 0.29 -0.22 0.27 (0.28) (0.47) (0.28) (0.47) (0.28) (0.47) Prior Ties -0.24** 0.01 -0.26*** 0.02 -0.28*** 0.03 (0.10) (0.11) (0.10) (0.11) (0.10) (0.11) Contract Length 0.18** 0.18* 0.15* 0.17* 0.16** 0.17* (0.08) (0.09) (0.08) (0.09) (0.08) (0.09) Annual Meetings -0.38** -0.06 -0.39** -0.08 -0.42** -0.06 (0.19) (0.28) (0.19) (0.28) (0.19) (0.28) Contract Date 1991 - 2000 0.49 4.64 0.51 4.97 0.45 4.95 (0.79) (39.23) (0.79) (40.10) (0.78) (39.82) Contract Date 2001 - 2010 0.65 4.07 0.74 4.42 0.61 4.44 (0.79) (39.23) (0.79) (40.10) (0.79) (39.82) Contract Date 2011 - 2020 0.65 4.17 0.76 4.52 0.66 4.53 (0.79) (39.23) (0.79) (40.10) (0.79) (39.82) Contract Date 1980 - 1990 - - - -Knowledge Proximity 0.13 -0.01 0.14 -0.02 (0.08) (0.11) (0.09) (0.11) Interdependence -0.03 0.09 -0.03 0.08 (0.08) (0.11) (0.08) (0.11) -0.13 0.10 (0.08) (0.11) Observations 195 195 195 195 195 195 LR chi2 39.89 39.89 43.17 43.17 45.97 45.97 Prob > chi2 0.000807 0.000807 0.00194 0.00194 0.00200 0.00200
Standard errors in parentheses | *** p<0.01, ** p<0.05, * p<0.1 | Knowledge Proximity X
Interdependence
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7 Discussion and Conclusion
Research on strategic alliances identifies contractual governance of international joint ven-tures (IJV) as an important means to reduce conflicts, stimulate interpartner cooperation, pro-tect proprietary knowledge and economize on transaction costs (Luo, 2005; Reuer & Devarakonda, 2016). Hitherto, literature rarely focused on a combined comparison of diverse governance bodies and the interrelation of their power structures with antecedent firm char-acteristics. Thus, the given thesis aimed at contributing to research through the analysis of joint venture contracts from high-tech industries in order to evaluate if knowledge proximity and interdependence among parent firms of a joint venture impact the scope of control and coordination power for board of directors and joint steering committee, respectively. Here, it also tested the interaction effect between the characteristics and the immediate distribution of decision-making authority for the two governance bodies. While the regression analysis has not been able to provide significant support for any of the proposed hypotheses, it still contributes valuable insights to the illustration of joint venture contracts, their varying empha-sis on structural components, the importance of firm characteristics and interfirm relations.
Main goal of this thesis was to expand research on the objective of transaction cost theory relating to the importance of contractual governance in joint ventures (Oxley, 1999). Despite the lack of significance of results to confirm or deny the proposed hypotheses, the findings still highlight certain objectives of transaction cost theory in terms of governance structuring and characteristics. First, the analysis of contracts has shown a high diversity in contract design and exegesis. For this, governance is an important means to ensure contracts and consequently ventures to be as highly individual and adaptable as possible in order to ac-commodate to their respective needs and risks (Pisano, 1989). Said individuality could po-tentially explain the fairly high and consistent standard errors observed throughout all three models of the regression. This would also stand in line with the argumentation that a board of directors embodies more than just a control mechanism and consequently requires a holistic approach to research and analysis (Cuypers et al., 2017). With control variables showing a significant impact of trust (‘prior ties’), consistency of knowledge exchange (‘annual meetings’) and contractual precautions (‘contract length’), the findings depict a trend towards the ne-cessity of pre-requisitions to allow high adaptability of contracts in order to avoid hazards ex post as opposed to the impact of interfirm characteristics (Luo, 2005; Nguyen et al., 2019). In light of the aforementioned risk of unavoidable incompleteness of contracts this would require a thorough research in the future (Nippa & Reuer, 2019).
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interrelation of frequency of knowledge exchange, interfirm trust and as well as the complexity of contracts with the scope of decision-making power and intensity of contractual governance. Lastly, the freedom of contract and individuality of venture purposes, goals and strategies differentiates joint ventures eminently. That is why a holistic approach to the design of joint venture governance as well as to the analysis of its interrelations is always recommended.
Main shortcomings regarding this research can be found within the data collection as well as the methodology of this thesis. First, the data collection only included information from the USPTO and thus excluded patent filing of firms that were registered with authorities outside of the US. Second, human error caused the misspelling of firm or venture names at registra-tion which is likely to have resulted in the partial neglect of relevant US-patent classificaregistra-tion data and thus further reduced the potential pool of analyzed data. Human error at the time of analysis of joint venture contracts could have also contributed to large variances in the col-lected data. Third, the retracing of full joint venture contracts has been rather challenging. Thus, it is to be emphasized that the results of the analysis are to be carefully put in the context of the limited data sample. Said relatively small sample size and the imminent individuality of joint venture contracts potentially counteracted the finding of significant results. Additionally, the present methodology potentially contributed to deficiencies in the analysis and conse-quently to insignificant findings. In particular, omitting the influence of the portfolio diversity of the parent firms could have potentially contributed to the insignificance of the results. As parent firms commonly contribute insights originating from their portfolio diversity as well as from their intangible knowledge stock, they tediously influence the insights, processes and knowledge structure of the established venture (Wuyts & Dutta, 2014). For this, the correction of endogeneity bias would have been necessary and should be considered in future research attempts. Furthermore, the attempt of determining interdependence between parent firms as an independent variable solely on the basis of the purpose of the joint venture is likely to have led to the insignificance of the statistical results. Originally, this was intended as an extension to transaction cost theory, which favors hierarchical governance modes in cases of high transaction and knowledge transfer costs and commonly measures the interfirm interdependence via resource, collaboration and solution interdependence (Chen & Chen, 2002; Luo, 2005; Sampson, 2007). However, said attempt to redefine the computation of in-terdependence failed to lead to significant results. Perhaps the purposes should have rather been used as complementary observations or control variables instead.
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of the venture and two, whether their implementation accounts for a reduced need of dispute resolution.
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