`
Formal institutional factors are underestimated in
international joint venture performance: An empirical
research in the manufacturing and service sector
Yucheng Huang S2522195
Supervisor: P.J. (Paulo) Marques Morgado Co-assessor: M. Astarlioglu
ABSTRACT
International joint venture performance is a challenge for businesses and scholars. Transaction costs theory suggests success of joint ventures depends on the extent to which transaction costs are lowered with elimination of uncertainties. Contextual uncertainty in the host country is one factor having influence on the outcome of the cooperation. Based on an institutional perspective in international business, contextual variables, in which economic activities are embedded, have impacts on joint venture performance. While informal institutional factors draw enough attention of scholars and businesses, if the effects of formal institutional factors are underestimated in the practice of international joint ventures remains unclear.
In this research, two specific regulatory institutional factors, contract enforcement and access to infrastructure, are selected to analyze for their impacts on actual outcomes of international joint ventures to differ from its expected values. Through the analysis, it is expected to find the actual performance of joint ventures differ from the expectation of the cooperation. The difference is assumed to be due to the impacts of formal institutional factor are underestimated. Also, the research is expected to find positive influences of having a high level of formal institutional factors on the actual joint venture performance.
This research chooses a sample of 99 international joint venture cases over the world between 2007 and 2016, within the manufacturing and service sector.
TABLE OF CONTENT
ABSTRACT ... 1
INTRODUCTION ... 4
LITERATURE REVIEW ... 8
International joint venture and Transaction costs theory ... 8
International joint venture performance ... 9
To eliminate uncertainties - the Control-performance relation ... 10
To eliminate uncertainties - Bargaining ... 11
Expectation vs actual IJV performance ... 12
Institutional perspective on joint venture performance ... 13
Normative and cognitive factors on international joint ventures... 14
Regulatory factors on international joint ventures ... 15
Contract enforcement ... 16
Infrastructure access ... 18
Conceptual Model ... 19
METHODOLOGY ... 20
Research Design ... 20
Research strategy and time horizon ... 20
Samples and data collection ... 21
Measurement of variables... 23
Expected performance of IJV ... 23
Actual performance of IJV ... 23
Descriptive Analysis ... 27 Correlations ... 28 Multicollinearity ... 29 Inferential Analysis ... 30 T-test ... 30 Regression ... 31 CONCLUSIONS ... 33 Managerial Implications ... 36
Limitations and future research ... 37
INTRODUCTION
International joint venture has become a major business and organizational form for MNEs (Child, 2002; Hu & Chen, 1996). With more firms internationalizing and market continues globalizing, international joint venture provides MNEs opportunities to expand in global market rapidly, create scale of economy, acquire and facilitate strategic resources, reduce risk, learn new knowledge and skills (Park & Ungson, 1997). However, the performance of international joint venture continues to be a challenge for players and scholars considering its high instability and consequently a high rate of dissolution (Park & Ungson, 1997; Pothukuchi, Damanpour, Choi, Chen, & Park, 2002). The exit rate of international joint venture is around 50 percent, which is higher than mergers and acquisitions in some industries (Park & Ungson, 1997).
What cause such instability and what influence the implementations of joint ventures with enhancing the performance? To look into the issue, transaction costs theory is selected as the theoretical foundation of this research. Uncertainty of the environment in the host country and the behavior of the alliance partners could significantly increase transaction costs in the alliance which would negatively affect the performance (Child & Yan, 2003; Yiu & Makino, 2002). Level of control is an important predictor of the performance of joint ventures (Child & Yan, 2003). MNEs often increase their level of control over the cooperation in order to eliminate risks due to the lack of trust in the partners to avoid opportunism behaviors (Beamish, 1993; Gulati, 1995).
DiMaggio, P. J & Powell, W.W, 1983). Thus the instability of IJV performance might be influenced by the risks and uncertainties in the local environment (Beamish, 1993; Child & Yan, 2003; Granovetter, 1985; Kostova, 1997).
With an institutional perspective in international business, institutions are the “rules of the game” for MNEs to operate in different countries (North, 1990). The institution environment has a key impact on the entry mode selection and performance (Bae & Salomon, 2010; Kogut & Singh, 1988; Kostova, 1997). Institutional theory distinguishes institutions with three pillars: regulatory (e.g. laws), cognitive (e.g. habitual actions) and normative (e.g. culture, professions) (Scott, 2005). These structures and activities have various carriers, such as cultures, structures and routines (Scott, 2005).
Former studies have emphasized on and have provided empirical proof of the effects of culture distance or other cognitive/normative factors on IJV performance (Kogut & Singh, 1988; Oxley, 1999; Park & Ungson, 1997; Pothukuchi et al., 2002). Oxley asserts long cultural distance would increase costs of joint ventures relative to contractual alliances (Oxley, 1999). Park & Ungson found difference in cultures adds misunderstanding and consequently lead to IJV failure (Park & Ungson, 1997). Some studies, applying the Hofstede cultural dimensions, found the national culture difference between joint venture parents has a major impact to cause IJV failure and unsatisfied performance (Pothukuchi et al., 2002). It also has been noticed that national culture distance increases costs of acquisitions relative to green field or joint ventures because of the difficulties to integrate foreign management (Kogut & Singh, 1988).
activities (Kostova, 1997; Scott, 1995). These factors are categorized as the regulatory pillar according to the institution theory (Kostova, 1997; Scott, 1995). In terms of measuring IJV performance, studies suggest these “unmanageable” exogenous success factors may create uncertainties and thus influence the actual performance of IJV to be different from the expected value.
In order to gain more insights into the role that formal or regulatory institutional factors plays on IJVs performance, this research selects two specific factors, namely contract enforcement and infrastructure accessibility.
Quote from Rousseau, Rousseau & McLean Parks (1993) “Contracts are fundamental to ….. actions of organizations. They imply cooperation and consensus, but often engender dispute and disagreement”. No matter how well-design the contracts are, violations of the agreements from one or both sides of the partnership always occur (Antia & Frazier, 2001). The contract enforcement reflexes as the time, cost and procedural complexity to resolve a standardized commercial dispute between two businesses (World Bank Group, 2016a).
Infrastructure is considered as “life supporting services”and has long been under the monopoly of government in countries like China (Zhang, Gao, Feng, & Sun, 2015). In this research, the access to electricity is chosen to measure the level of infrastructure in the country where the IJVs takes place. It measures from all procedures required for a business to obtain a permanent electricity connection and supply, which include applications and contracts with electricity utilities, all necessary inspections and clearances from the distribution utility and other agencies, and the external and final connection works (World Bank Group, 2016b).
Therefore, the research question for this research is: Are formal institutional
factors underestimated in the actual international joint ventures performance?
years (Beamish, 1993; Child & Yan, 2003; Hu & Chen, 1996). Instead of looking into one country, this research selects completed IJV cases over the world in the manufacturing and service sector, which take place during 2007 to 2016.
Through this research, the effects of regulatory/formal institutional factors on the actual performance of international joint ventures can be tested. This research focuses on two specific factors: contract enforcement and infrastructure accessibility. High level of contract enforcing quality and infrastructure accessibility are expected to lower transactional costs and uncertainty in the cooperation. This helps MNEs to create competitive advantages and also ensure the success of international joint venture.
The research is expected to find that contract enforcement and infrastructure accessibility are not sufficiently considered in the estimation of IJV performance before being implemented. The insufficient considerations are reflected as a difference between the actual and the expected performance. Moreover, the impacts of the two institutional factors on IJV performance are expected to be considerable. On that basis, it is also expected to find the influence by these two factors is significantly positive. In another word, the actual IJV performance will be higher than the expected value when contract enforcement has a higher quality or when infrastructure is easy to access in the local context.
LITERATURE REVIEW
International joint venture and Transaction costs theory
While competitiveness and competitive advantage have become the keywords that draw a lot of attention from MNEs with the development of globalized economy, international joint venture has become a major business and organizational form for MNEs (Child, 2002; Hu & Chen, 1996). IJV is a separate legal organizational entity representing the partial holdings of two or more parent firms, in which the headquarters of at least one parent firm is located outside the country of operations of the joint venture.” (Shenkar & Zeira, 1987). A common form of IJV is to establish an entity between an MNE and a local domestic company in the country which the local partner operates (Shenkar & Zeira, 1987).
The selection of strategic alliance, as a third alternative in governing economic activities other than hierarchy and market, depends on the magnitude of the transaction costs involved (Chen & Chen, 2003; Yiu & Makino, 2002). Transaction costs theory suggests high uncertainty and opportunism are important variables that make businesses choose joint ventures over contract (Chen & Chen, 2003; Child & Yan, 2003; Kogut & Singh, 1988; Yiu & Makino, 2002). Pisano suggests that the more transaction costs in the alliance, the more hierarchical governance would be chosen (Pisano, 1989).
Uncertainties can be categorized into two forms: contextual or behavioral uncertainties (Yiu & Makino, 2002).Contextual uncertainty includes the bounded rationality of decision makers and it rises from changes of institutional conditions such as political and economic instability, legal rules, and cultural and social relations embedded in national environment. For example, study found joint ventures are used by MNEs to reduce political risks through a share of ownership with local firms (Hennart, 1988). Although he mentioned that the motive is not obvious enough since firms can reduce the visibility and still exploit advantages through other entry modes such as licensing and franchising. But in the meanwhile, study suggests that considering the appropriate costs and the needs for managing uncertainty, a governance mode which can provide more hierarchical control than market is preferred (Gulati & Singh, 1998). Therefore, joint venture is preferred as an efficient governance mode by MNEs, based on the transaction costs theory.
International joint venture performance
parties in the joint venture reaches their own strategic objectives, such as lower the transaction costs, access to the strategic resources that is absent but needed, or learn new knowledge and skills, enter the new market with adapting to the new environment, or share risks operating in the foreign market. The system performance, which reflects more directly compared to the goal performance, shows if the venture performs well as a business unit. It can be seen as if the joint venture partners recover their financial capital investment. Ideally, an IJV should be able to meet both performance definitions.
Similarly, some other researches summarize the methods of measuring joint venture performance as objective (termination, duration, financial gains) and subjective (goal attainment, satisfaction) types (Beamish, 1993; Park & Ungson, 1997). Furthermore, Beamish found there is a correlation between the subjective and objective performance in both developed and developing countries (Beamish, 1993). It suggests that the subjective measures, which reflect as satisfactory towards the cooperation or the extent to which the goal of IJV was achieved, will have impact on the objective measures of the performance, and vice versa.
To eliminate uncertainties - the Control-performance relation
Control is a critical concept for performance of joint ventures by overcome uncertainties (Child, 2002; Geringer & Hebert, 1989; Yan & Gray, 1994). Related to the issue of eliminating uncertainty, two types of factors are identified by studies that would determine joint ventures performance: endogenous and exogenous success factors (Child, 2002). Child sees the endogenous success factors are the manageable ones for the parents in the alliance. These are the firm level factors concerns such as legal independence of parent firms creates control problems, cultural differences. To manage such endogenous factors, theories give solutions to increase the level of control, by increasing ownership for example, in the alliance, thus lower the transaction costs (Beamish, 1993; Child & Yan, 2003; Yiu & Makino, 2002).
of bureaucratic, cultural and informal mechanisms, to influence subunits and members to behave in ways that lead to the attainment of organizational goals (Geringer & Hebert, 1989; Yan & Gray, 1994). Insufficient or ineffective control limits managers’ ability to coordinate activities and the efficiency to implement strategies (Geringer & Hebert, 1989).
To increase the control level, it can be done through both capital and non-capital investment, which can be shown in both strategic and operational aspects (Child, 2002). Capital control concerns the cash resource and other assets on joint venture balance sheet (Child, 2002). For example, land, provision of technology, facilities and brand names. This is seen as equity ownership by studies in alliances. However, it cannot ensure a high control level (Geringer & Hebert, 1989). In most of the cases, majority equity ownership means a dominant control, especially in the developed countries (Beamish, 1993). The non-capital investment includes management, system, service and training and other factors that cannot be capitalized into assets (Child, 2002). The control is enhanced by the increase of dependence of the venture. This reflects a high commitment by the parent to the alliance (Child, 2002).
However, researches cannot find consistent results on the relationship between control and performance (Child, 2002; Geringer & Hebert, 1989). In another word, a high control level does not ensure a high level of performance. Moreover, it has been suggested that when foreign firm hold more than 50 percent of the equity, the joint venture is considered “unstable” (Beamish, 1993). In order to overcome this, the local partner can limit the instability by contributing more other than only offering local knowledge (Beamish, 1993). Thus it can be seen that a trade-off of control between the foreign and local partners would eliminate the uncertainty to some extent but not ensure the success of the joint venture.
To eliminate uncertainties - Bargaining
power to change the outcome of the negotiation and to win the accommodations from the other party (Yan & Gray, 1994). During the process specifying the mutually acceptance on the conditions and the cooperation, these bargaining will generate uncertainty and thus bargaining costs (Pearce, 1997). According to Pearce, such uncertainty might stem from lack of trust, imperfect communication, anticipated difficulties and verifying post-contract performance, or the JV environment (Pearce, 1997).
Interestingly, while other studies relate bargaining power with accessing and transferring local knowledge, and efficiency of acquire resources (Inkpen & Beamish, 1997; Yan & Gray, 1994), Pearce asserts that time has more opportunity costs comparing with bargaining costs. He suggests that the time spending on the bargaining can save more time to make more important strategic decisions. Therefore, to have a strong bargaining power in the joint venture would save more time in the bargaining and that means task of reaching and higher quality of implementation of decisions (Pearce, 1997). Therefore, a high bargaining power would be important for the success of joint venture.
Expectation vs actual IJV performance
To have an expectation of IJV performance is one thing while if getting the same actual performance or even getting an actual performance is another. More than half the intended joint ventures in China have not even been actually implemented while signing agreements normally means a very likely implementation in other countries (Beamish, 1993). As joint ventures are wildly acknowledged as a difficult form to manage, which cause a high (30% to 70%) of management dissatisfaction and early terminations, researches did not look into the management process and implementations (Pearce, 1997). This research suggests this high rate of failure to implement might because of the uncertain factors in the country.
MNEs (Child, 2002). These factors for example, are institutional and economical context where the joint venture is located (Child, 2002). These unmanageable factors would increase the uncertainty and risks to allow more opportunism behaviors. New institutional economics suggests that room for opportunism and uncertainty creates risks which would lead to an increase of transaction costs (Granovetter, 1985; Williamson, 2000; Yiu & Makino, 2002). Since economic behaviors are embedded in the local social, cultural, political environment (DiMaggio, P. J & Powell, W.W, 1983; Granovetter, 1985), the uncertainty in the context will significantly affect the outcome the economic activities, for example joint venture in this case.
In the research of the high instability of joint venture in terms of unexpected terminations, Park and Ungson assert that companies generally would not dissolute successful joint ventures but only when the cooperation are not financially viable (Park & Ungson, 1997). They found national cultural distance have a significant impact on the success rate of the strategic cooperation after it has been implemented (Park & Ungson, 1997).
Therefore, it should be logical to assume that the institutional factors are having impacts to international joint venture performance during implementations. These factors make international joint ventures actual performance differ from the expected performance. In another word, in the process of implementation of the joint venture, the presence of these institutional factors, which are difficult to manage, the actual outcome is deviated from the “ideal” performance that being expected. Thus the null hypothesis is formulated as:
Ho. The actual performance of international joint ventures is the same as the expected value prior to the joint venture.
Institutional perspective on joint venture performance
critical for firms to expand their business across national boundaries (Bae & Salomon, 2010). Economic activities are embedded in, which means deeply influenced by, the social environments (Bae & Salomon, 2010; DiMaggio, P. J & Powell, W.W, 1983). It is not surprise to find that institutional distance has a key impact in entry mode selection and performance (Bae & Salomon, 2010; Kogut & Singh, 1988; Kostova, 1997).
It has been observed by studies MNEs often face the “liability of foreignness” which stem from a lack of knowledge about local culture, regulations. Consequently the LOF would increase the transaction costs in the operation (Bae & Salomon, 2010). To overcome the liability of foreignness, firms need to seek legitimacy in order to survive the social environment through corresponding to regulations and norms, which means efforts should be done on both formal and informal institutional distance.
Institutions include 3 pillars, which are regulatory (e.g. laws), cognitive (e.g. habitual actions) and normative (e.g. culture, professions) structure and activities, with various carriers, such as cultures, structures, routines (Scott, 2005). Some studies categorize them into two: the formal and informal institutions.
Normative and cognitive factors on international joint ventures
The cultural difference has impacts on the control in the cooperation. A long geographical and cultural distance would present a particular challenge for manage the control in the joint venture (Child, 2002). Moreover, since the basic believe and values are different between countries while they have a long cultural distance, e.g. Japan and United States, it would have difficulties in the negotiation. The difference in culture would influence the mutual confidence and trust of mangers and in return challenge the efficiency of negotiations (Peterson & Shimada, 1978). Therefore it would have impact on the performance of joint venture by increasing the bargaining costs.
It is obvious that informal institutions matter for the international joint venture performance. However, much less attention is paid to the formal institutional factors. The regulatory pillar, while the normative and cognitive pillars representing the informal institutions, is playing as the only part in the framework speaks to formal institutions (Bae & Salomon, 2010). It should be logical to assume the formal institutions are also important for MNEs to consider while form and evaluate international joint ventures. Thus this report will look into the effects of formal or regulatory institutional factors.
Regulatory factors on international joint ventures
utilities sector to consider while operating abroad (Bae & Salomon, 2010).
As mentioned previously based on the transaction costs theory, one of the most important motives of going for international joint venture is to lower transaction costs to gain competitive advantages. As mentioned by Bae & Salomon, formal rules are designed to facilitate exchanges reducing transaction costs. These institutions reduce transaction costs through improving the security of property rights and contract enforcement (Bae & Salomon, 2010).
Moreover, the rule of law is codified by a country’s governance infrastructure (Huang & Sternquist, 2007). Thus, the study found that the host country’s level of infrastructure can effectively reduce uncertainty of operating in the host country and make it possible to predict what the firm can expect from the local legal system.
Thus it should support the findings from previous researches that formal institutional factors would significantly influence joint venture performance.
Contract enforcement
“Contracts are fundamental to ….. actions of organizations. They imply cooperation and consensus, but often engender dispute and disagreement.” (Rousseau & McLean Parks, 1993). As a matter of fact, contractual alliances can offer a number of advantages to the cooperation such as flexibility, less institutional relationship between partners (Chen & Chen, 2003). However, as mentioned previously, control is an important mechanism that MNEs want to have in order to achieve success. Thus, it was suggested by Chen that equity joint venture, as more hierarchical governance mode, is more preferred than contractual alliances by MNEs when transaction costs are high (Chen & Chen, 2003).
uncertainty and nontrivial commitment and thus cost-minimizing transactions would be possible in the contract-implementation stage (Gong et al., 2007).
However, it has been brought up by studies that every joint-venture contract is necessarily incomplete and no matter how well-design they are, there are always violations of the contracts from one or both sides of the partnership (Antia & Frazier, 2001; Henisz, 2000). Furthermore, although it should be equal to all the players in the context, some individuals create the rules and contracts in their own private interest. Transaction costs will rise and contractual hazard will happen consequently (Aidis, Estrin, & Mickiewicz, 2008; Henisz, 2000).
Therefore, as joint venture being selected by MNEs as a governance mode for strategic alliance, which has more hierarchical control over a pure contractual alliance, an effective enforcement over the contracts is needed to ensure the performance.
Moreover, while operating joint ventures in some countries, firms rely on trust other than contract (Child & Yan, 2001). It has been found that companies from countries with Anglo-Saxon cultures relies more on the contracts while Japanese rely on trust. But even if there is a huge difference view towards contracts, businesses from Japan would rely on some formal dispute settling mechanisms to achieve a mutual goal and ensure the success of the cooperation (Gong et al., 2007).
Considering the literature, it is logical to assume that while the institutional environment in term of contract enforcement is strong, there should be lower transaction costs and lower level of uncertainty which would have a positive effect on the performance. Thus, the hypothesis is formed as
Infrastructure accessibility
Infrastructure is considered to be “life supporting services”and has long been under the monopoly of government in countries like China (Zhang et al., 2015). Insufficient access to infrastructure has been a problem for almost all countries; this problem is exacerbated by the lack of funds available in the public sectors (Zhang et al., 2015).
Infrastructure may be and may not be physical presences. Joint venture accesses to the new markets with quick speed and low price by borrowing local infrastructures (Inkpen & Beamish, 1997). These infrastructures could be sales forces, local plants, market intelligence, and the marketing presence necessary to understand and serve local market (Inkpen & Beamish, 1997).
The availability of infrastructure is important for attracting FDI. From a resource-based view, having more access to the infrastructure means MNEs can reach more country-specific advantages which allow MNEs to use these CSAs to build competitive advantages (Buckley, Forsans, & Munjal, 2012). That allows MNEs to internalize and transfer these CSA and integrate with their own FSAs to build competitive advantages so enhance the productivity eventually. Studies also assert that through joint ventures, MNEs can learn from local partners for knowledge and skills to deal with the regulatory institutions, which are unfavorable for foreign players, such as institutional infrastructures (Yiu & Makino, 2002). From a transaction costs theory, study found joint ventures in developing countries such as China and Brazil would face low level of accessing to infrastructure, comparing with developed countries. Alliances in such countries would face more uncertainties which lead to an increase in transaction costs (Child & Yan, 2003).
Based on the theory of transaction costs that minimizing transaction costs can ensure the performance of a cross-border M&A, a high accessibility to the local infrastructure might imply a better performance for the M&A practice.
Electricity system is a critical infrastructure for modern society (Krause, Vachon, & Klassen, 2009). Electricity consumption is positively correlated with GDP thus is important for the economic development (Jumbe, 2004). Research also shows that electricity generation, as a typical economic infrastructure, also reflects the political environmental changes (Henisz, 2002). Krause assert that a well-developed and advanced electricity system would ensure the capacity of the infrastructure in the nation (Krause et al., 2009). Thus it is logical to assume a high level of access to infrastructure in the host country would have positive effect on the actual performance of the international joint venture. Thus the hypothesis is
METHODOLOGY
The purpose of the research is look into the impact that two specific formal institutional factors, namely contract enforcement and infrastructure accessibility, have on international joint venture performance. The research asks for an appropriate research design.
Research Design
The research is designed based on a positivism and empiricism assumption on the phenomena. Positivism believes that true belief is grounded in what can be perceived and that what can be perceived is based on the reality (Ryan & Scapens, 2002).
Since it is a positivism research, a deductive approach will be suitable to be applied in this research to test the hypotheses based on the observation of the phenomena and the data collected.
Research strategy and time horizon
In order to have a better understanding on the effects that institutional factors have on IJV performance, by testing the hypotheses, a quantitative research will be applied. To apply a quantitative research means a quantity of data are needed to be collected to establish a statistically significant result. This research will apply an archival research strategy which is conducted with existing material. Data will be collected from existing databases to test the hypotheses to fit with a quantitative deductive research approach. Since this report applies only a quantitative research, thus it is a mono-method research.
During this time, more risks and uncertainties might be faced by MNEs and international joint venture activities. Thus, the impacts of institutional factors on performance might be more significant. This setting of time horizon will also ensure more samples can be selected so to test the hypotheses.
Samples and data collection
In total 99 International joint venture cases since 2007 in manufacturing and service sectors is collected from Zephyr (Table 1). The list of the match between country and country code can be found in Appendix. Among the 99 cases, most of them occur in China. The regulatory standards differ regionally in such a big country. Thus this research distinguishes China into 3 regions: China-Beijing (CN-B), China-Shanghai (CN-S) and China-other (CN). Similarly, Japan is distinguished into Japan-Tokyo (JP-T) and Japan-Osaka (JP-O). Russia has two regions: Russia-Moscow area (RU-M) and other (RU).
Overview of IJV cases
Target
Country Frequency Percent
Cumulative Percent
Country
code Frequency Percent
Cumulative Percent CN-B 17 17.2 17.2 ES 2 2.0 85.9 CN 13 13.1 30.3 GB 2 2.0 87.9 CN-S 11 11.1 41.4 JP 2 2.0 89.9 IT 8 8.1 49.5 SE 2 2.0 91.9 JP-T 7 7.1 56.6 AT 1 1.0 92.9 MY 5 5.1 61.6 GR 1 1.0 93.9 TH 5 5.1 66.7 IN 1 1.0 94.9 FR 3 3.0 69.7 NO 1 1.0 96.0 JP-O 3 3.0 72.7 PH 1 1.0 97.0 KR 3 3.0 75.8 RU 1 1.0 98.0 KY 3 3.0 78.8 RU-M 1 1.0 99.0 TW 3 3.0 81.8 UA 1 1.0 100.0 DE 2 2.0 83.8
The reason of choosing secondary data is it is more time efficient being collected and analyzed over primary data. To collect primary data from multi-national retailers
will be very timely consuming.
Joint ventures taking place around the world are considered. Not only are developing countries included, but also developed countries. The reason to include all the countries is that institutional factors are believed to be equally important when it comes to joint venture performance estimations. No matter it takes place in developing countries or developed countries, or what motive MNEs have on starting the alliance practice, the difference in national conditions are significant for MNE considerations.
Data of institutional factors is collected from the Doing Business Project (DBP) provided by World Bank. The DBP measures the regulations applied to businesses through their life cycles. In this research, two specific types of regulatory institutional factors are selected from the data base. The indexes for “enforcing contracts” and “access to electricity”, which is the measurement for infrastructure accessibility, are collected. The DBP project was started in 2002 and the first release was in 2003. The project updates annually with well-developed methods. In this research, the selected indicators are from the latest updated data which is based on the research in 2015.
In some countries, since the difference within the country, the DBP gives different scores for different regions in the country. For example, two sets of data are given for China, namely Beijing and Shanghai. The two cities are the most important for the country which have significant influence to the region. The same typology applies to Japan (Tokyo and Osaka).
Measurement of variables
International joint venture cases are collected world wildly, thus it is predictable they are implemented in region currencies. In order to eliminate the risk that currency exchange rate causes, all the financial indicators are transferred into US dollars based on a yearly average exchange rate, which shows at thousands.
Expected performance of IJV
The expected performance of IJV is measured by the pre-deal target revenue. The pre-deal revenue is the revenue before the deal was announced. For example, in the AMUNDI SA case, both parties announced the joint venture in July of 2009. Therefore the pre-deal revenue is for the end of the previous year, 2008. Since the number is before the joint venture was actually implemented to the field operations, it is an estimated figure which both parties expected the cooperation hopefully might achieve in the following year, after considering all the factors they believe would have impacts on the practice.
Actual performance of IJV
Similarly, the actual performance of IJV cases is measured by revenue, which is categorized as “Post-deal target financials”. The revenue data is for the first year after the joint venture being completed. For example, the AMUDI SA case is announced completion on 31 December 2009, thus the post-deal revenue is on the same date. The difference in term of the revenue between one-year of implementation of the joint venture shows how the actual outcome shifting from what it was expected.
Contract enforcement
institutional variable contract enforcement.
The index measures if the economy adopts good practice in court system in four dimensions with 18 points in total. By summing the points, the indicator shows that the economy that scores higher means a better and more efficient judicial system.
Access to infrastructure
The access to infrastructure variable is measured by the “Getting Electricity” indicator from the Doing Business Project by World Bank. The indicator looks into the procedure for a business to obtain permanent electricity connection and supply for a standardized warehouse (World Bank Group, 2016b). These procedures include applications and contracts with electricity utilities, necessary inspections and clearances from the distribution utility and other agencies, and the external and final connection works (World Bank Group, 2016b).
In this research, the time a business needs to use to get permanent electricity is applied to measure the level of access to infrastructure. The time is recorded as calendar days. The median duration that electricity utilities and experts assert that is necessary in practice, rather than required by law, is captured in the measurement. The measurement also assumes no time is wasted by the business and each procedure is being executed without delay. The time that used to gather information by businesses is taken into considerations. Therefore, it means that the less the days that business needs in the economy, the better access to infrastructure it can get in the economy.
Control variables
Industry type has been selected as control variable, which is outside of the scope of this research.
Industry type
According to the typology of economy sectors, there are three economic sectors: primary sector (e.g. agriculture, fishing, and extraction such as mining), and secondary sector, which is known as manufacturing sector, and lastly, tertiary sector, known as service industry (Kaldor, 1976). Among the 3 sectors of world’s economy, the primary sector is relatively stable comparing with the other two, which is also defined as the non-industrial sector (Kaldor, 1976). Thus, the industrial sector, including manufacturing and service sectors, is selected in this research.
Type Variable Description Source
IV Expected IJV performance Pre-deal Target revenue The Zephyr database DV Actual IJV performance Post-deal Target revenue The Zephyr database MV Contract enforcement Efficiency of the judicial system in
the host country to solve commercial disputes by measuring time and costs
The Doing Business Project by World Bank Group
MV Access to infrastructure Getting Electricity- time of getting electricity
The Doing Business Project by World Bank Group
Control variable
CV Industry Type Manufacturing and Service sector Manually: filtered from the Zephyr database
Data analysis
The following sections explain the statistical tests used to test the hypotheses. The null hypothesis has the purpose of establishing whether there is a difference between the expectations and actual outcome of joint venture performance. To test this hypothesis an independent samples the t-test is performed. The other Hypotheses are aimed to test the individual effects and the moderating effects. When one or several independent variables are proposed to affect one dependent variable, regression is the appropriate technique to use.The formula of a regression analysis is as follows:
Y = β0 + β1 * X1i + β2 * X2i + β3 * X3i +ε
Parameter β0 and β1 are the regression coefficients. β1 is the slope, while β0 is the intercept of a straight line which connects Y to Xi. The slope tells what happens with the interdependent variables if the dependent variable increases with one unit. The ε is the error term, which bridges the difference between the actual Xi and the estimated Xi. To apply to the hypothesis testing in this research, the formula of the regression is as follows:
Actual outcome performance of IJV = β0+ β1* Expected performance of IJV+ β2* Contract enforcement + β3* Access to infrastructure + β4* (Expectation* Contract enforcement) + β5* (Expectations * Access to infrastructure) + ε
Analysis
Descriptive Analysis
As can be seen in Table 3, there are 99 international joint venture cases spread over 25 countries and regions, with both pre-deal revenue and post-deal revenue available for this research. Since 2007, the most popular destinations are China (N=41), Japan (N=12) and Italy (N=8). There are 87 manufacturing firms and 12 service companies.
The actual performance (N=99), which is the post-deal target operating revenue, ranged from 10.9 thousand USD to 14,627.5546 million USD (M=429.8712, SD=1,623.7084). The lowest actual revenue falls into the target country of Germany, Japan and Italy, and the largest revenue outcome goes to cases take place in also Italy, Japan (Tokyo region) and Germany.
Table 3: Descriptive Statistics
N Minimum Maximum Mean Std. Deviation
Post-deal target operating revenue/turnover
(.mil USD)
99 0.0109 14,627.5546 429.8712 1,623.7084
Pre-deal target operating revenue/turnover (.mil USD) 99 0.0000014 7,105.7994 294.7609 884.6313 Access to infrastructure 96 18 263 105.5885 48.2289 Contract enforcement quality 96 6.5 15 12.0031 2.6662 Valid N (listwise) 96
For two moderating variables, contract enforcement and access to electricity, 3 joint venture cases are missed because of no data is available for a specific country of Kayman Islands. Therefore, total 96 cases are taken into the analysis in this research.
Access to electricity (N=96) ranged from 18 to 263 days among the 25 countries and regions which have been selected (M=105.5885, SD=48.2889). The countries with the least access to electricity are Ukraine (263), Russian Federation in general (160.5) and Russian Federation-Moscow region (150). The countries with highest access to electricity are Korea Republic (18), China Taiwan (22) and Austria (23).
Quality of contract enforcement (N=96) ranged from 6.5 to 15 (M=12.0031, SD=2.6662). The countries with the lowest quality of jurisdiction system are Thailand (6.5), Philippines (7.5) and India (7.5). The countries with the highest efficiency of enforcing contracts are United Kingdom (15), China-Shanghai region (14.5) and China in general (14.1).
These values and variations could also reflect the outcomes of this research. In order to look into that deeper, the following sections cover the correlation analysis.
Correlations
Multicollinearity
None of the Pearson’s correlation coefficients of predictors in Table 4 are 0.8 or higher. This result gives strong indication that there is little multicollinearity. In order to control for multicollinearity, a VIF test is also conducted.
Variance inflation factors (VIF) were controlled for. VIF scores above 5 (Rogerson, 2001) is strong evidence of multicollinearity. In order to eliminate issue of multicollinearity, centered variable are used. As shown in Table 5, no VIF are higher than 5 thus multicollinearity is no longer an issue for this research after using the centered variables.
Table 5: Test for Multicollinearity
Variable VIF 1/VIF
Expectations IJV performance 1.024 0.98
Contract Enforcement (CE) 1.160 0.86
Access to Infrastructure (AI) 1.172 0.85
Expectations * CE_centered 1.329 0.75
Expectations * AI_centered 1.340 0.75
Mean VIF 1.205
Table 4: Correlations
1 2 3 4 5 6
1. Actual IJV performance 1
2. Expectation of IJV performance .963** 1
3. Contract enforcement .013 .005 1
4. Access to Infrastructure -.006 -.034 .363** 1 5. Expectation* Contract Enforcement-
Centered .161 .048 -.118 -.024 1
6. Expectation *Access to Infrastructure-
Centered .194 .147 .026 -.063 .483
** 1
Inferential Analysis
The null was tested by means of a T-test. To test Hypotheses 1, 2, a multiple regression was used. In this regression, model 1 to 4 tested the direct relationships, whilst model 5, 6 and 7 tested the moderation effects.
Table 6: Setup of multiple regression
Variables/Model 1 2 3 4 5 6 7
Expected IJV performance x x x x x
Contract enforcement x x x x
Access to Infrastructure x x x x
Expectations * Contract Enforcement x x
Expectations * Access to Infrastructure x x
T-test
To test the null hypothesis, the mean for actual IJV performance was compared to the expected IJV performance through a one-sample T-test. The results of this T-test are shown in Tables 7 and 8. As shown in Table 6, the actual IJV performance measured in post-deal target revenue (M= 429.87, SD= 1623.71, mil USD) is higher than what was expected (M= 294.76, SD= 884.63, mil USD). By comparing the mean of actual IJV performance to the expectation, the difference was not significant t(98)= 0.828, p>0.05; which also shows from the low effect size of r= .052. This means the actual performance of IJV is not significantly different from what it was expected to work out.
Table 7: One Sample Statistics; Expected Vs Actual IJV performance
N Mean Std. Deviation Expected IJV performance 99 294.76 884.63 Actual IJV performance 99 429.87 1623.71
Table 8: One-sample T-test: Expected Vs Actual IJV performance
T-test for Equality of Means
t df sig.(2-tailed)
Mean Difference
95% confidence Interval of the Difference
Lower Upper
Actual IJV
Regression
Table 8 below provides a summary of the OLS multiple regression results. The first model excludes other variables, while only testing the effect on the independent variable- expected IJV performance. The overall model is significant as indicated by the significant F-value. The model has a rather large R2 with .928.
The model 2 and model 3 test the direct effects that moderating variables might have on the dependent variable. In model 3, it has been observed access to infrastructure has significant Beta-coefficient on the dependent variable. However, the insignificant F-values and very small R2 in both models suggest that the moderating variables, namely contract enforcement and access to infrastructure, have no significant direct influences on the actual performance of international joint ventures. The 2 moderating variables are tested alongside the predictor variable in Model 4, without taking the interaction effects into account. However, the Beta-coefficients for the two moderators were not significant even though the F-value for the model is significant and the R2 gives a high explanatory power.
The Hypothesis 1 and 2 predicted positive effects on the actual IJV performance deviated from what is expected. The effects are tested in Model 5 to 7. Firstly, each moderator is involved individually (Contract enforcement in Model 5, Access to infrastructure in Model 6). The interactions for both moderators in Model 5 and 6 are significant. However, the Beta-coefficients are insignificant with significant F-values and high adjusted R2. It cannot conclude that contract enforcement has significant influence on the relationship between the expected and actual IJV performance in model 5 and neither can access to infrastructure in model 6.
Table 8: Regression Results
Standardized coefficients
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7
1.Expected IJV performance 1.768*** 1.770*** 1.757*** 1.755*** 1.759***
(.050) (.051) (.046) (.051) (.047)
2.Contract enforcement 8.014 -1.238 13.422 7.954
(63.763) (18.527) (15.740) (17.031)
3.Access to Infrastructure -.207* -.928 1.013 .832
(3.525) (1.025) (.936) (.937)
4.Expectations * Contract Enforcement .110*** .110***
(.024) (.027)
5.Expectations * Access to Infrastructure .003** -8.779E-5
CONCLUSIONS
Findings
Through testing a sample of 96 IJV cases (99 collected) in the manufacturing and service sectors, this research created a linkage between formal institutional factors and the implementation of international joint ventures. The effects of formal institutional factors on the actual performance which might differ from the expectations were tested based on the transaction costs view. Two specific formal institutional factors were selected: contract enforcement and infrastructure accessibility.
To test if formal institutional variables have impacts on the implementations, IJVs with both pre-deal revenue and post-deal revenue available were taken. Analyzing the relationships, proxies for the two regulatory institutional factors were selected from the Doing Business Project by World Bank. Hypotheses were made of which one was aimed at comparing the expectation performance and actual performance, one predicted the positive impact of contract enforcement on the actual performance, and another one was to test the possible positive influence of a high access to infrastructure.
The null hypothesis (H0) assumed the actual after-implantation performance of IJVs to be exactly the same as the expected value prior to the joint venture. The T-test showed a non-significant result so cannot reject the null hypothesis. Although it was found that the expected performance has a strong relationship with the actual performance. The result in fact means the actual IJV performance is not significantly different from their expectation values for the sample cases selected.
environment (Granovetter, 1985; Williamson, 2000; Yiu & Makino, 2002). One possible reason of which the null hypothesis cannot be rejected in this research might be related to a more extended view on the MNEs’ choice on governance mode. Contract is the default choice for MNEs with little control and low level of transaction costs (Chen & Chen, 2003). While MNEs are trying to enter a foreign country, they need to face uncertainties stem from lack of the local knowledge. Thus businesses often choose market mechanisms to enter the new market at the beginning with low risk of failure and exit costs. After getting familiar with the local market, they might increase the control and equity investment into the cooperation and choose a governance mode like joint ventures with more commitment. However, once the partner thinks the cooperation is facing too much uncertainties and risks, the cooperation would be terminated without being actually implemented. This can be an explanation for the fact observed by other researches the termination rate of joint ventures are so high (Beamish, 1993; Pearce, 1997). The other joint ventures which are actually implemented have considered most of the factors that could create the uncertainties and risks. If they can be implemented, the results would to the most extent match the expectations.
The Hypothesis 1 and 2 predicted positive influences of contract enforcement and access to infrastructure on the actual performance of international joint ventures. The multiple-regression test results cannot support the hypotheses. The insignificant findings mean the quality of contract enforcement and the level of infrastructure accessing do not significantly influence the implementation of joint ventures differing form the expected values.
assumption the hypothesis was built on that there are always violations of the contracts and IJV contracts are necessarily incomplete (Antia & Frazier, 2001; Henisz, 2000). While contract disputes not happen frequently in the cases chosen for this research, the effects of the quality of contract enforcement might be not significant to be observed. Secondly, among the 99 cases which were selected for this research, most cases were from China (41) and Japan (12). It was suggested by theories that trust can also play an important role in alliances besides contract enforcement (Child & Yan, 2001). To be more specific, Japanese firms rely on trust than contracts to manage cooperation (Child & Yan, 2001). Therefore, another explanation for the finding might be that partners in international joint ventures might rely more on informal dispute settle mechanism than the formal ones, for example contracts enforcement, to ensure the success of the cooperation. Thirdly, since the actual and expected performance were not significantly different, it is possible that the impacts of the quality of contract enforcement in the local market had been taken into estimation of the cooperation sufficiently before the implementations.
one of the priority infrastructure conditions in the host country before a joint venture being implemented. In fact, theories categorized local knowledge and market intelligence as non-physical infrastructures (Inkpen & Beamish, 1997). The non-physical infrastructures might also matter and should be more involved in the estimation of joint venture performance.
To summarize the findings by the empirical tests, by testing the 96 IJV cases since 2007 in the manufacturing and service sectors, it was found the actual performance is not significantly different from the expected values before implementations. Besides, the regulatory (formal) institutional factors that were selected in this research cannot find statically significant proofs to support their effects on the actual IJV performance. This result gave a possible explanation that that other formal variables might matter more than contract enforcement and electricity accessibility. It could also because that the selected two factors had been sufficiently involved in the considerations of the estimations of IJV performance.
Managerial Implications
This research has few implications for managers even though the actual performance is proved to be not significant different from the expected value. Since there is a high correlation between the expected value and the actual performance, it suggests that managers need to be careful when making the plan before the implementations of international joint ventures. They should include as many factors into considerations as they would be influential to the actual performance of the cooperation. By doing so, an accurate estimation can maximize the chance of reaching a successful outcome with an efficient implementation.
disputes, instead of always using formal mechanisms like contract enforcement. However, the extent to which rely on trust rather than contracts should also depend on the national culture in the host country. Therefore, while looking into formal institutions, the effects of informal (normative, cognitive) institutions also need to be enough considered by MNEs.
Since the institutional factors are the “unmanageable” factors for MNEs to operate in an unfamiliar context, it might overdraw attention in the operations while ignoring the “manageable” ones. Therefore, MNEs cannot ignore the control-performance relationship in the implementation of the alliance. To be more specific, managers need to maintain a reliable level in terms of capital and non-capital investment to create a strong connection with the partners in the alliance so to keep the stability of the joint venture. Moreover, a strong bargaining power is also needed for MNEs to keep in order maintaining the control over the alliance.
Limitations and future research
This research has limitations and leaves areas for the future researches to explore. They will be specified in the following section.
Firstly, the field of measuring international joint venture performance is so large that various studies and scholars have found proofs of the impacts of vast variables based on different theories. It should be more ideal to include all of the variables, both objective and subjective measurements (Beamish, 1993; Park & Ungson, 1997). However, it was not feasible to include all the variables mentioned by the previous studies. Future research could construct a more comprehensive approach by integrating all these theories and variables.
performance. Moreover the limitation on the sample size leaded to a flawed sample structure. About half of the sample was from a similar cultural/regulatory region. That might lead to a biased result of the research. The future research could try to gather more primary data so to have a better structured sample set, therefore might have a smaller variance.
The future research should also look deeper into the impacts of regulatory factors in implementation of international joint ventures. It had been found in this research the level of access to infrastructure might not be influential significantly after the operation starts. However, as stated in the conclusions, an unexpected change in the infrastructure access in the host country can be also included in the measurement of this variable so to get a deeper view. Besides, other than physical infrastructures, non-physical infrastructures such as access to local insights could be considered having impacts.
REFERENCE
Aidis, R., Estrin, S., & Mickiewicz, T. 2008. Institutions and entrepreneurship development in russia: A comparative perspective. Journal of Business Venturing, 23(6): 656-672.
Antia, K. D., & Frazier, G. L. 2001. The severity of contract enforcement in interfirm channel relationships. Journal of Marketing, 65(4): 67-81.
Bae, J., & Salomon, R. M. 2010. Institutional distance in international business research. Advances in international management: The past, present and future of
international business and management, 23.
Beamish, P. W. 1993. The characteristics of joint ventures in the people's republic of china. Journal of International Marketing, 1(2): 29-48.
Bourreau, M., Doğan, P., & Lestage, R. 2014. Level of access and infrastructure investment in network industries. Journal of Regulatory Economics, 46(3): 237-260. Chen, H., & Chen, T. 2003. Governance structures in strategic alliances: Transaction cost versus resource-based perspective. Journal of World Business, 38(1): 1-14. Child, J. 2002. A configurational analysis of international joint ventures.
Organization Studies, 23(5): 781-815.
Child, J., & Yan, Y. 2001. National and transnational effects in international business: Indications from sino-foreign joint ventures. MIR: Management International
Review: 53-75.
Child, J., & Yan, Y. 2003. Predicting the performance of international joint ventures: An investigation in china*. Journal of Management Studies, 40(2): 283-320.
DiMaggio, P. J & Powell, W.W. 1983. The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American
Sociological Review, 48 , p147-160. 14p.(2): 147-160.
Dornean, A., Işan, V., & Oanea, D. 2012. The impact of the recent global crisis on foreign direct investment. evidence from central and eastern european countries.
Procedia Economics and Finance, 3: 1012-1017.
Gong, Y., Shenkar, O., Luo, Y., & NYAW, M. 2007. DO MULTIPLE PARENTS HELP OR HINDER.
Granovetter, M. 1985. Economic action and social structure: The problem of embeddedness. American journal of sociology: 481-510.
Gulati, R. 1995. Does familiarity breed trust? the implications of repeated ties for contractual choice in alliances. Academy of management journal, 38(1): 85-112. Gulati, R., & Singh, H. 1998. The architecture of cooperation: Managing coordination costs and appropriation concerns in strategic alliances. Administrative Science
Quarterly: 781-814.
Henisz, W. J. 2000. The institutional environment for multinational investment.
Journal of Law, Economics, and Organization, 16(2): 334-364.
Henisz, W. J. 2002. The institutional environment for infrastructure investment.
Industrial and corporate change, 11(2): 355-389.
Hennart, J. 1988. A transaction costs theory of equity joint ventures. Strategic
Management Journal, 9(4): 361-374.
Hu, M. Y., & Chen, H. 1996. An empirical analysis of factors explaining foreign joint venture performance in china. Journal of Business Research, 35(2): 165-173.
Huang, Y., & Sternquist, B. 2007. Retailers’ foreign market entry decisions: An institutional perspective. International Business Review, 16(5): 613-629. Inkpen, A. C., & Beamish, P. W. 1997. Knowledge, bargaining power, and the instability of international joint ventures. Academy of management review, 22(1): 177-202.
Jumbe, C. B. 2004. Cointegration and causality between electricity consumption and GDP: Empirical evidence from malawi. Energy Economics, 26(1): 61-68.
Kaldor, N. 1976. Inflation and recession in the world economy. The Economic
Journal, 86(344): 703-714.
Kogut, B., & Singh, H. 1988. The effect of national culture on the choice of entry mode. Journal of International Business Studies: 411-432.
Kostova, T. 1997. COUNTRY INSTITUTIONAL PROFILES: CONCEPT AND
Krause, D. R., Vachon, S., & Klassen, R. D. 2009. Special topic forum on sustainable supply chain management: Introduction and reflections on the role of purchasing management*. Journal of Supply Chain Management, 45(4): 18-25.
Lairson, T. D. 2011. The global financial crisis and the restructuring of the world economy. AIB Insights, 11(4): 3-7.
North, D. C. 1990. Institutions, institutional change and economic
performanceCambridge university press.
Oxley, J. E. 1999. Institutional environment and the mechanisms of governance: The impact of intellectual property protection on the structure of inter-firm alliances.
Journal of Economic Behavior & Organization, 38(3): 283-309.
Park, S. H., & Ungson, G. R. 1997. The effect of national culture, organizational complementarity, and economic motivation on joint venture dissolution. Academy of
Management journal, 40(2): 279-307.
Pearce, R. J. 1997. Toward understanding joint venture performance and survival: A bargaining and influence approach to transaction cost theory. Academy of
Management Review, 22(1): 203-225.
Peterson, R. B., & Shimada, J. Y. 1978. Sources of management problems in
japanese-american joint ventures. Academy of Management Review, 3(4): 796-804. Pisano, G. P. 1989. Using equity participation to support exchange: Evidence from the biotechnology industry. Journal of Law, Economics, & Organization, 5(1): 109-126. Pothukuchi, V., Damanpour, F., Choi, J., Chen, C. C., & Park, S. H. 2002. National and organizational culture differences and international joint venture performance.
Journal of International Business Studies: 243-265.
Rousseau, D. M., & McLean Parks, J. 1993. The contracts of individuals and organizations. Research in organizational behavior, 15: 1-1.
Ryan, B., & Scapens, R. W. 2002. Research method and methodology in finance and accounting.
Scott, W. R. 1995. Institutions and organizationsSage Thousand Oaks, CA.
Scott, W. R. 2005. Institutional theory: Contributing to a theoretical research program.
Shenkar, O., & Zeira, Y. 1987. Human resources management in international joint ventures: Directions for research. Academy of Management Review, 12(3): 546-557. Williamson, O. E. 2000. The new institutional economics: Taking stock, looking ahead. Journal of economic literature, 38(3): 595-613.
World Bank Group. Enforcing contracts- what is measured?.
http://www.doingbusiness.org/data/exploretopics/enforcing-contracts/what-measured 23-04-2016.
World Bank Group. Getting electricity - what is measured?.
http://www.doingbusiness.org/data/exploretopics/getting-electricity/what-measured 23-04-2016.
Yan, A., & Gray, B. 1994. Bargaining power, management control, and performance in united States–China joint ventures: A comparative case study. Academy of
Management journal, 37(6): 1478-1517.
Yiu, D., & Makino, S. 2002. The choice between joint venture and wholly owned subsidiary: An institutional perspective. Organization science, 13(6): 667-683. Zhang, S., Gao, Y., Feng, Z., & Sun, W. 2015. PPP application in infrastructure development in china: Institutional analysis and implications. International Journal
