The influence of host country corruption on international joint venture performance

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The influence of host country corruption on international

joint venture performance

Master thesis by Esperanza Maria van Keulen

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Abstract

Host country corruption is still a relevant topic that companies have to deal with in their business operations. Corruption leads to the choice of an international joint venture (IJV) as governance mode. However, an IJV as governance mode often leads to unsatisfying performance. This thesis takes the form of an exploratory study and examines the relationship between host country corruption and international joint venture performance. It is hypothesised that corruption has a negative effect on the longevity of IJVs because of a lack of trust and an increase in conflicts between the partners. Through means of quantitative and qualitative research, focusing on international joint ventures in Scandinavia and North Africa, no support has been found for this hypothesis. The examination even led to indications that host country corruption can positively influence international joint venture longevity because of the unfulfilled business opportunities and the benefits the local partner can provide in the corrupt host country. Furthermore, the qualitative case analysis found indications that business opportunities and equity position can affect international joint venture performance. Interesting observations regarding the likelihood of host country exit have also been made. Future research needs to examine the established propositions.

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1. Introduction

“Corruption and hypocrisy ought not to be inevitable products of democracy, as they undoubtedly are today”; a press statement by Gandhi in 1934 that captured the inevitable role of corruption in governments and countries, and the necessity of people to deal with this issue (Balaji, 2012). Currently, country corruption is still a relevant issue that people and companies have to deal with. Generally speaking, corruption leads to lower levels of trust (Morris & Klesner, 2010). Corruption has been extensively examined in the current academic literature. The causes of corruption, the effect of corruption and the impact of corruption are only just a few examples of the many directions the academic literature on corruption has taken.

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also manifests itself on the individual and firm level. Multinational enterprises (MNEs) have to find a way of dealing with this corrupt host environment.

One way of dealing with this issue is through means of strategic alliances, another highly relevant topic in today’s globalising world. Dyer and Singh (1998) stressed the importance of interfirm resources and strategic alliances for creating a sustainable competitive advantage. This relational view acknowledges the importance of combining resources with alliance partners, since interfirm linkages can create a sustainable competitive advantage. One common strategic alliance form is the ‘international joint venture (IJV)’. The academic literature is very extensive with regard to IJVs. Despite the popularity and frequency of IJVs as an entry mode, the performance of many IJVs is unsatisfactory (Geringer & Hebert, 1991). In this research, international joint ventures are defined as ‘two or more legally distinct organisations, of which at least one partner is headquartered outside the joint venture’s country of operation, that actively participate in the decision-making activities of a jointly owned entity’ (Geringer, 1988; Geringer & Hebert 1989). Multinationals attempt to gain legitimacy in a foreign country with governmental uncertainty due to corruption by partnering with established firms (Uhlenbruck, Rodriguez, Doh & Eden, 2006).

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Combining the topics can thus be interesting. Although host country corruption can be a main reason for IJV establishment, what will its effects be on the performance of the actual IJV once established? Will the negative features of host country corruption that caused the IJV formation, function as a moderating factor on international joint venture performance? Will it strengthen or weaken the likelihood of unsatisfactory performance that is often associated with international joint ventures? These questions are interesting and have not yet been addressed in the academic literature, and therefore the main research question of this thesis is:

What is the relationship between host country corruption and international joint venture performance?

This research takes the form of an exploratory study. Through the examination of sixteen international joint ventures, insights will be gained on the relationship between host country corruption and international joint venture performance. The analysis will focus on joint ventures between a local partner originating from the host country and a foreign partner originating from the US. Because of the clear distinction in corruption level (Kaufmann, Kraay & Mastruzzi, 2010), North Africa and Scandinavia have been used as the host country regions. Given the sensitivity of host country corruption, and the difficulty of assessing international joint venture performance, establishing a link between these concepts is challenging. Through means of seven international joint venture cases in North Africa and nine cases in Scandinavia, this thesis aims to gain familiarity with this relation, with the purpose of directing future research.

This research is relevant and has theoretical and practical implications because awareness will be created of the effect country level corruption can have on business level entities. Globalisation has increased the likelihood that companies will encounter corruption, which makes it important to understand the implications of corruption on the firm level (Uhlenbruck et al., 2006). On a practical or managerial level, it will make managers realise they have to operate consciously and with caution in a country with corruption. The actual performance effects of the consciously made and theoretically grounded decision to enter a corrupt host country through an IJV have not yet been examined. This thesis contributes to gaining insights in this matter by exploring the field and the concepts, and gaining initial familiarity with the relationship.

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2. Literature Review

In this literature section, the theoretical foundations for this thesis will be examined. Based on this review, an exploratory analysis for contributing to the literature and for answering the question ‘What is the relationship between host country corruption and international joint

venture performance?’ will be developed and performed.

2.1 IJV as entry mode versus IJV performance

Woodcock, Beamish and Makino (1994) examined the relationship between ownership entry modes and performance. They describe that the importance of entry mode selection for a company’s competitive advantage has been examined extensively, however the effect of this mode on performance has not been widely studied. They acknowledge the existence of a contingent relationship between entry mode choice, firm characteristics and the environment. They examined the effect of this entry mode choice on performance. They conclude that different entry modes result in different performance levels. For this thesis, the focus will be on the entry mode IJV, and the variations in IJV performance related to the environmental factor ‘host country corruption’. The research by Woodcock et al. (1994) distinguishes between entry mode choice and actual effect and consequences of the choice, which is a crucial difference. In this thesis, such a distinction is made between on the one hand, international joint ventures as an entry mode choice and on the other hand, the actual performance of these joint ventures once they are established.

2.2 IJV as entry mode

2.2.1 Equity and non-equity alliances

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opportunistic behaviour. Non-equity based alliances, or contractual alliances (Oxley, 1999), do not involve equity exchange, instead they encompass arm’s-length market exchanges. The partners work together from their own organisational borders. From a transaction cost perspective, the choice of entry mode depends on the transaction costs (Oxley, 1999), with the less common equity alliance mode as the most suitable option when the transaction costs are high. Transaction costs, and thus indirectly the choice of organisational mode, can depend on many different factors such as interfirm trust between alliance partners (Gulati, 1995) and the institutional environments (Oxley, 1999), which also encompasses corruption.

2.2.2 Distinction between foreign and local partner

Per the definition, international joint ventures are ‘two or more legally distinct organisations, of which at least one partner is headquartered outside the joint venture’s country of operation, that actively participate in the decision-making activities of a jointly owned entity’ (Geringer, 1988; Geringer & Hebert 1989). This is however a very broad concept definition, and for the purposes of this thesis, the population will be narrowed down considerably. Inkpen and Beamish (1997), with the purpose of examining IJV instability, distinguish between a local partner, which is the partner originating from the country in which the IJV is established, and a foreign partner originating from a different country. The foreign partner and the local partner both have different objectives and requirements when entering into the IJV.

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performance. The distinction between foreign and local partner will be used throughout this paper, with a focus on the foreign partner within the IJV relationship.

Cuervo-Cazurra (2006) provides evidence that host country corruption can have either a positive or a negative influence on FDI, depending on the level of corruption in the home country. If investors have already been exposed to corruption in their home country, they might not be deterred by host country corruption. Therefore, in this thesis it will be assumed that only the local partner is originating from a corrupt country, so that the foreign partner is not biased towards selecting corrupt host countries because of the similarities with the home country with regard to institutional conditions (Cuervo-Cazurra, 2006). Furthermore, this thesis will focus on IJVs established in the host country the local partner is originating from. Since there is a negative relationship between GDP per capita and corruption (Bentzen, 2012), and generally speaking, corruption is high in low-income or developing countries (Olken & Pande, 2012), corrupt host countries are thus often emerging markets.

2.2.3 The influence of corruption on entry mode choice

Uhlenbruck et al. (2006) examined how MNEs adjust their strategy when entering corrupt foreign markets, and introduced corruption as an independent country-level factor influencing the entry mode choice of MNEs. In general, western firms prefer international joint ventures as entry mode when the country risk is high (Meschi & Riccio, 2008). The uncertainty related to corruption increases this country risk. Javorcik and Wei (2009) found that when host country corruption increases, companies shift the ownership structure of their foreign operations towards joint ventures, since the host country corruption increases the value of using a partner with local knowledge to deal with the bureaucratic situation.

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foreign subsidiary in a corrupt host country. Advantages of partnering with a local firm are the cutting of resource costs, the increase in knowledge about the host country environment, access to local networks and a higher chance of gaining external legitimacy in the corrupt host country (Uhlenbruck et al., 2006). Based on this examination, it can be concluded that generally corruption leads to the choice of an international joint venture as the preferred governance mode.

2.3 Defining IJV performance

2.3.1 IJV performance

For this thesis, international joint ventures have been defined as ‘two or more legally distinct organisations, of which at least one partner is headquartered outside the joint venture’s country of operation, that actively participate in the decision-making activities of a jointly owned entity’ (Geringer, 1988; Geringer & Hebert 1989). Gong, Shenkar, Luo and Nyaw (2007) found that international joint venture performance is negatively related to the number of joint venture partners, mediated by contract completeness and partner cooperation. Because of the limited number of cases used for this exploratory analysis, the difference in the number of joint venture partners will not be taken into account in the analysis. No distinction will be made between joint ventures with two partners and joint ventures with more partners. This would divide the sample into even smaller subsets, making it more difficult to make inferences about the population.

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different perspectives. This makes IJV performance assessment a complicated construct. This relational aspect is important in assessing IJV performance, and can be better understood by examining IJV instability.

2.3.2 IJV instability and failure

International joint venture instability does not necessarily mean failure (Park & Russo, 1996). Instability can be termination of the joint venture, changes in the ownership structure, reorganisations or contractual renegotiations (Yan & Zeng, 1999). Due to high coordination costs, many strategic alliances are merely transitional in nature rather than stable (Porter, 1990). Once a competitive advantage has been created, the alliance can become obsolete. In their study of joint venture instability, Inkpen and Beamish (1997) focus on IJVs in which the foreign partner is seeking a long-term operating presence in the host country. This will also be assumed in this thesis, because in that way IJV termination can be considered unsatisfactory performance only when the foreign partner does not replace the IJV operations with another form of direct investment in the corrupt host country. In this thesis, instability is defined as a significant change in the relationship between the partners that was premature and unplanned from the perspective of at least one of the partners (Inkpen & Beamish, 1997).

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thesis, failure constitutes dissolution of the IJV or acquisition by the local partner or a third party, without it being replaced by an alternative business operation for the foreign partner in the corrupt host country.

According to Inkpen and Beamish (1997), instability in the IJV is caused by changes in partner dependency and related shifts in bargaining power. When the foreign partner gains local knowledge, which is generally an intention of the foreign partner, its dependency decreases, which can cause IJV instability. Gomes-Casseres (1987) also pointed out that as country conditions change, the initial preference for a joint venture as entry mode may change and lead to new ownership structures. Through the joint venture the foreign firm gains information and knowledge about the local market and gradually acquires legitimisation in the country (Meschi & Riccio, 2008). Therefore, many joint ventures end simply because this was intended and anticipated. Joint ventures are established with an objective in mind, once this objective or these goals of the joint venture are met, the anticipated dissolution takes place (Park & Russo, 1996). This means that it is problematic to consider all IJV terminations as failure because terminations can be anticipated by the involved parties (Inkpen & Beamish, 1997).

2.3.3 IJV longevity as IJV performance indicator

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Gathering performance data for IJVs through means of financial data is difficult because financial data is unavailable for IJVs and is only incorporated in consolidated company data (Pothukuchi et al., 2002). Due to this lack of availability of financial performance data, longevity will be used as IJV performance indicator in this thesis. Park and Russo (1996) mention the importance of studying the effect of time on the failure of international joint ventures. They described that the tendency for joint venture failure will initially rise to a peak and then decline with time. The duration pattern of joint ventures is best described through an inverted U shape, and the joint venture failure rate reaches its peak approximately 3 years after initial joint venture establishment. Park and Russo (1996) dedicate this failure rate peak after a few years of operations to an initial first honeymoon period. During the second life cycle stage, conflicts will cause dissolution of IJVs, while during the third stage mature joint ventures have become capable of resolving tensions and conflicts (Meschi & Riccio, 2008).

However, Inkpen and Beamish (1997) note that joint venture success is not synonymous with joint venture longevity. But since the likelihood of conflict is higher when there are cultural differences, and that corruption represents a high cultural difference factor, it is expected that the longevity of IJVs in corrupt host countries is shorter. Hennart and Zeng (2002) concluded that cross-cultural differences between joint venture partners lead to earlier joint venture dissolution. In order to determine IJV longevity or duration, a starting date and an ending date are needed. Thus, longevity and dissolution are theoretically closely related. Therefore, for the purposes of this research, joint venture longevity is a suitable factor to use. The extent to which there are structural differences in longevity of joint ventures in corrupt host countries and non-corrupt host countries will be examined. A structurally lower dissolution age for joint ventures in corrupt host countries, as compared to joint ventures in non-corrupt host countries, can indicate potential failure because the dissolution occurred in the initial joint venture period, and as Park and Russo (1996) found, this is not normally the case.

2.3.4. Relationship corruption and performance

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with corrupt business practices, and will be less familiar with more ethically correct business practices; there is a difference in company culture. Fey and Beamish (2000) confirmed that dissimilar companies forming an IJV are likely to have more conflict than similar firms that form an IJV. When IJV partners have a good relationship and there is minimal conflict between them, good IJV performance is likely to follow (Fey & Beamish, 2000). So, partner conflict or institutional issues caused by country corruption can lead to IJV dissolution and a shorter IJV longevity. This relationship is depicted in figure 1 and leads to the following hypothesis for examination:

Hypothesis 1: Host country corruption negatively influences international joint venture

longevity. International joint venture longevity Host country corruption

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3. Research Methodology

In the previous section, some theoretical foundations were derived from findings in the existing literature. In this section, the appropriate methods to explore the theoretical foundations, to answer the research question and to provide useful insights for future research, will be discussed.

3.1 Research design

For this exploratory research, a mixed method design that combines the conduction of qualitative and quantitative research will be used. Quantitative research means that factual knowledge will be gained through observation. The researcher’s role, according to the positivism philosophy, is limited to the collection and interpretation of data through the use of an objective approach, resulting in quantifiable findings (Wilson, 2010). Through means of qualitative research, knowledge will be acquired to develop a better understanding of the established phenomena (Blumberg, Cooper & Schindler, 2011). The formal or quantitative part provides a descriptive account of the situation and this is followed by a qualitative part that further explores the concepts and phenomena through a multiple case study. This deeper exploration will lead to the formation of propositions for future research (Blumberg et al., 2011).

The statistical analysis will test the hypothesis. However, in order to acquire all the appropriate data for this analysis, the case study is also required. For the statistical analysis to test the hypothesis, data is needed on country corruption, on international joint ventures, the longevity of these IJVs and the location of these IJVs. The data on country corruption, international joint ventures and their location can be acquired through means of databases. The data on the longevity of the IJVs will be acquired through a multiple case study. Therefore, the two methods will collect complementary data and will be integrated rather than conducted in complete separation (Yin, 2008). This multiple case study simultaneously also attempts to explain the why and how of the examined phenomena. The qualitative and quantitative examinations are both directed towards answering the question ‘what is the

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3.2 Population and research setting

In this thesis, the distinction between a foreign and a local IJV partner is used. The population for this thesis consists of two geographical regions for the local IJV partner. On the one hand, the region Scandinavia represents low host country corruption and on the other hand, North Africa represents high host country corruption (Kaufmann et al., 2010). Scandinavia can be defined as Denmark, Finland, Norway and Sweden. North Africa can defined as the countries containing the vast Sahara, namely Algeria, Chad, Egypt, Libya, Mali, Mauritania, Morocco, Niger, Sudan and Tunisia (de Blij & Muller, 1994). Western Sahara is geographically located within the vast Sahara, but due to a lack of data availability, it will not be included in the population. The US will be used as the home country or foreign partner in these IJV relationships because they are distant from country corruption. The US also makes a suitable home country as they represent an economically developed country, home to many MNEs willing to invest internationally.

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3.3 Quantitative research

3.3.1 Data collection: IJVs

In order to test the hypothesis and to contribute to answering the research question, secondary data should be derived from existing databases. The database Zephyr, in combination with Orbis, will be used to determine the cases for examination. The international joint venture cases will be determined based on completed-confirmed and completed-assumed deals, established in the time period 2008 until today. Zephyr and Orbis also provide information on IJV location, as the cases are determined based on a foreign partner originating from the US and the local partner originating from a host country in the regions North Africa and Scandinavia. Zephyr and Orbis provide information on the establishment date of the IJVs, but data on longevity and dissolutions are not available. This data will therefore be gathered through a multiple case study.

3.3.2 Data collection: country corruption

Data on the level of corruption in the host country can be derived from existing databases. Most of the available data on country corruption are subjective and perception based, because actions are based on perceptions and interpretations of situations. Also, specifically for corruption, there are no considerable alternatives because it is difficult to capture corruption with objective measures (Kaufmann et al., 2010).

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will be used to determine the host country corruption levels. Because of annual minor changes and updates in the sources on which the scores are based, the annual update of the WGI overrules the versions of previous years for the whole time period covered (Kaufmann et al., 2010), and therefore the latest update of 2015 will be used for this thesis.

Kaufmann et al. (2010) reported the data as a percentile rank between 0 and 100, with higher values indicating better control of corruption and thus less country corruption. For all percentile estimates, the 90 percent confidence interval, also referred to as the margin of error, is reported. The reported standard error term deals with uncertainty related to imperfect measurement of an indicator in a country and uncertainty due to an imperfect relationship between a concept and the indicator. In this thesis, the WGI data will be interpreted carefully with regard to these margins of error. The aggregate corruption measures between countries will be compared, but these margins of error allow for a more sophisticated use of information, as an overlap in confidence interval might signal a difference between countries that is not statistically significant (Kaufmann et al., 2010).

3.3.3 Hypothesis testing

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3.4 Qualitative research

The statistical testing of the hypothesis helps describe a phenomenon, namely whether there is a relation between IJV longevity and corruption. Further examination through means of multiple case studies is needed to examine the reasons for the phenomenon. A case study analysis takes a broad view on a problem and emphasizes the embeddedness of the phenomenon in its real-life context. Case studies allow for detecting patterns and potential explanations that might be unexpected (Blumberg et al., 2011). Case studies will provide insights into the reasons why joint ventures were terminated, whether the host country corruption contributed to the termination and whether the termination can be considered a failure. This can contribute to making inferences about a causal relationship between corruption and performance.

3.4.1 Multiple case study

Field research and case studies examine why phenomena occur and generate specific knowledge that cannot be gained from purely statistical analyses (Meredith, 2002). A multiple case study will be conducted to examine multiple joint venture cases with different country corruption levels. The objectives of this multiple case study are to find data on joint venture longevity and to provide more insights into the joint ventures and possible terminations as a way of determining and exploring whether the host country corruption influences international joint venture performance.

Zephyr and Orbis yielded sixteen international joint venture cases based on completed-confirmed and completed-assumed deals, established in the time period 2008 until today. Table 1 and table 2 provide the international joint venture cases that will be used for this multiple case study analysis. Table 1 provides the international joint venture Zephyr results for Scandinavia and table 2 provides the international joint venture Zephyr results for North Africa.

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similar phenomenon occurs under identical circumstances or a different phenomenon occurs under changing conditions (Blumberg et al., 2011). In this thesis, the cases can be divided into the two geographical regions Scandinavia and North Africa. These two groups differ on the theoretically important dimension ‘country corruption’ (Kaufmann et al., 2010) allowing for comparison across the two groups.

International joint venture Home country company Host country company Host country IJV activity Madison International realty and Søylen Eiendom joint venture

Madison International Realty LLC

Søylen Eiendom AS Norway Real estate development and management services

Odfjell Gas AS 1. Oak Hill Advisors LP 2. Breakwater Capital LTD (UK based)

Odfjell SE Norway Liquefied petroleum gas and ethylene shipping services Hedrin Pharmaceuticals K/S Manhattan Pharmaceuticals INC. Nordic Biotech K/S (Nordic Biotech Advisors ApS)

Denmark Pharmaceutical research and development services

Nestor Cables OY Management 1. Neomarkka OYJ 2. Vaasa industrial invest OY

Finland Cable manufacturer

SMPM international

Philip Morris International INC.

Swedish Match AB Sweden Smokefree tobacco products wholesaler E-aam Driveline

Systems AB

American Axle & Manufacturing holdings INC

Saab Automobile AB Sweden Driveline systems developer Nordic Global airlines OY Neff Capital Management LLC 1. Ilmarinen Mutual Pension Insurance Company 2. Finnair Cargo Oy

Finland Air freight services provider Benemilk OY Intellectual Ventures Management LLC Nordic Feed Innovation OY

Finland Cattle feed suppment intellectual property leasing services provider Nacka 369:32 JV

AB

Carlyle Group LP Oscar Properties Holding AB

Sweden Property developer

Table 1. Scandinavian international joint ventures

International joint venture Home country company Host country company

Host country IJV activity

Hill International Petrol (Egypt) LTD Hill International INC 1. Egyptian Natural Gas Holding Company 2. Egyptian Natural Gas Company

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Hill TMG Hill International INC

Talaat Moustafa Group Holding Company SAE

Egypt Project and construction management services Enersys-Assad Sarl Enersys Accumulateur Tunisien Assad SA

Tunisia Industrial battery manufacturer Honeywell Libya Technical Engineering JSC Honeywell International INC Rida Technical Services LTD

Libya Oil & gas process automation technology services

HKPI-JV Quintiles Transnational Corporation

1. Health Kare Pharma International

2. Ramco Import and Export company Egypt Pharmaceutical products wholesaler and marketing services. Algeria Tractors Company

Agco Corporation 1. L’Entreprise Publique Economique de Commercialisation de Materiels Agricoles 2. L’Entreprise Publique Economique de Production de Tracteurs Agricoles

Algeria Tractor producer

EDS-CPG IT services Maroc Electronic Data Systems Corporation Caisse de Dépôt et de Gestion Maroc Morocco Information technology consultancy services Table 2. North African international joint ventures

3.4.2 Data collection

For case studies, multiple sources of evidence can be used simultaneously. Documents will be used as the main source of evidence in this multiple case study analysis. This is related to the availability of these sources and the difficulty related to acquiring the appropriate joint venture information through other sources such as archives. Because documents include sources such as reports and newspaper articles, they should be handled with caution; the objectivity of the sources should be kept in mind.

3.4.3 Data analysis

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4. Results

4.1 Quantitative analysis results

The broadening multiple case study analysis has provided information on the longevity of the Scandinavian and North African joint ventures. The detailed analysis of the 16 cases is provided in tables in appendix 2. Each table is structured to contain all relevant information on the joint venture concerned. Based on the information available and deemed necessary for the analysis, each table consists of fourteen categories. The categories ‘joint venture partners’ and ‘joint venture function and information’ provide some general international joint venture information. The categories ‘establishment’ and ‘longevity’ provide longevity information. The categories ‘termination’ and ‘conflict’ provide insights into reasons for the possible joint venture terminations. The categories ‘foreign partner rationale’, ‘current market presence foreign partner’ and ‘failure’ provide insights into whether a potential termination can be considered failure. The categories ‘foreign partner information’, ‘local partner rationale’, ‘financial performance’, ‘striking observations’ and ‘executive information’ provide some other available and potentially relevant information that can contribute to answering the research question. If available, the relevant information for the joint venture on each category is provided and the used sources are also stated.

In most cases, the date of establishment and the date of termination have been identified. These can be used for the determination of the joint venture longevity, and in turn the joint venture longevity can be used for the statistical examination of the hypothesis. Table 3 provides an overview of the longevity of the Scandinavian joint ventures and table 4 provides an overview of the longevity of the North African joint ventures. The dates have been rounded to months. The country corruption levels based on the WGI index have also been provided in the tables.

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termination is also associated with certain assumptions, since for some cases minimal information is available which leads to assumption-based data. In the cases where the joint venture has not been terminated, June 2017 has been used as the month for determining the longevity, but their continuation has been acknowledged.

International joint venture Date of establishment Date of termination

Longevity Country Country

corruption percentile Madison International realty and Søylen Eiendom joint venture

November 2013 October 2015 1.9 years Norway 99.04

Odfjell Gas AS June 2014 June 2017* 3 years Norway 99.04 Hedrin

Pharmaceuticals K/S

March 2008 2012 3.8 years Denmark 98.08

Nestor Cables OY November 2007 June 2017 9.6 years and still going

Finland 99.52

SMPM international

February 2009 August 2015 6.5 years Sweden 98.56

E-aam Driveline Systems AB

October 2010 June 2017 6.7 years and still going

Sweden 98.56

Nordic Global Airlines

February 2011 June 2015 4.3 years Finland 99.52

Benemilk OY May 2013 June 2017 4.1 years and still going

Finland 99.52

Nacka 369:32 JV AB

November 2014 June 2017 2.6 years and still going

Sweden 98.56

Table 3. Longevity Scandinavian international joint ventures

* In December 2016 it was announced that one of the parents, Odfjell, wanted to exit the gas market at the right moment (see table 8, appendix 2). No more information has been disclosed, therefore, for the sake of the analysis, the current date has been used as termination date.

International joint venture Date of establishment Date of termination

Longevity Country Country

corruption percentile Hill International

Petrol (Egypt) LTD

December 2007 2013 5.1 years Egypt 35.10

Hill TMG May 2008 2013 4.7 years Egypt 35.10

Enersys-Assad Sarl

September 2008 June 2017 8.8 years and still going

Tunisia 55.29

Honeywell Libya Technical Engineering JSC

March 2010 June 2017 7.3 years and still going

Libya 0.96

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Company still going EDS-CPG IT

service Maroc

February 2007 June 2017 10.3 years and still going

Morocco 50.48

Table 4. Longevity North African international joint ventures

* There are serious indications that the HKPI joint venture does not exist anymore. The Quintiles annual reports are available as of 2013, and do not disclose any information on the joint venture. An undated list of Quintiles subsidiaries does mention HKPI-JV, therefore it is assumed that the joint venture has been terminated. For the sake of the analysis, 2013 has been used as the date of termination, because annual reports are available as of 2013 and they do not contain HKPI-JV information (see table 20, appendix 2).

Hypothesis 1, ‘host country corruption negatively influences international joint venture longevity’ has been tested. Descriptive statistics have been used to examine the data on assumptions, these descriptive statistics are provided in appendix 3. The data for the analysis does not contain missing data, it does not include any outliers and is approximately normally distributed. However, the data is not linear, and therefore a linear regression analysis with longevity as dependent variable and country corruption as independent variable is not possible.

Figure 2. Scatterplot correlation between longevity and country corruption level

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corruption ranking between the Scandinavian countries might not be statistically significant (Kaufmann et al., 2010). The country corruption indicator does signal differences in the level of corruption between the North African countries, explaining the appearance of a weak rather than non-existing relationship between longevity and corruption for this region in figure 2.

Levene’s test has been used to examine the homogeneity of the variance. The insignificant value of p=0,639 indicates that the group variances can be treated as equal for the T-test. The assumptions for performing a T-test were met, and since the assumptions for performing a linear regression analysis were not met, a T-test has been performed instead. The T-test examined whether there is a significant difference in longevity between joint ventures established in North Africa versus joint ventures established in Scandinavia. The mean longevity for joint ventures in North Africa is 6,186 years and the mean longevity for joint ventures in Scandinavia is 4,722 years. The mean difference of 1,4635 years is not significant (p=0,279). Hypothesis 1 is therefore not supported. Although the results are not significant, they do signal an interesting observation and can still provide insights. The T-test signals that North African joint ventures have a longer longevity than Scandinavian joint ventures, while based on the hypothesis it would be expected that North African joint ventures have a shorter longevity than Scandinavian joint ventures. Although not significant, this signals a potential positive rather than negative relationship between corruption and longevity. This is an interesting observation based on a small sample, and therefore future research should examine whether this positive relationship is a structural and significant phenomenon.

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is that there are a lot of unfulfilled business opportunities in that country. Also, a structurally higher dissolution age for joint ventures in corrupt host countries, as compared to joint ventures in non-corrupt host countries, can indicate a successful match between the local partner and the foreign partner, or a successful experience for the foreign partner in the corrupt host country. These arguments explain why corruption could be a positive factor for international joint ventures and lead to a longer IJV longevity. This leads to the following proposition for future research:

Proposition 1: Host country corruption positively influences international joint venture

longevity.

4.2 Qualitative analysis results

The purpose of the broadening multiple case study analysis was to provide more insights into international joint venture performance and host country corruption. The entire analysis of the Scandinavian and North African joint venture cases is provided in appendix 2. Some interesting observations were made during this case analysis.

4.2.1 Joint venture commitment

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information on its own rather than only being disclosed through the parent firms. These insights can signal low partner commitment to the joint venture. This is in contradiction with the initial equity argument that joint ventures as an entry mode are selected because they require investments by the alliance partners, as a way of indicating commitment by sharing equity and ownership (Gulati, 1995; Oxley, 1999).

Examining the equity position of the foreign partner in the joint venture leads to the observation that for the seven Scandinavian cases that provide foreign partner ownership data, the foreign partner does not have a majority equity position in the joint venture. The ownership is either equally distributed between the local and foreign partners or the foreign partner has a minority stake in the joint venture. For the North African joint ventures it can be observed from the five cases providing ownership information that the equity position of the foreign partner is more varied since the different forms ‘minority equity positions’, ‘majority equity positions’ and ‘equal distribution of ownership’ all occur. Interestingly, the two cases in which the foreign partner had a majority equity position were also joint ventures in North Africa that have been terminated. This corresponds with the finding of Beamish (2013) that joint ventures in developing countries have a greater chance of satisfactory performance when the multinational does not have a majority stake but has a minority stake or equally distributed ownership in the joint venture instead. He also mentioned existing regulations and high levels of corruption as a reason for multinationals to decide on a minority equity position in the joint venture. Thus, foreign firms should enter a corrupt host country through means of a minority or equally distributed ownership joint venture. This leads to the following proposition:

Proposition 2: The likelihood of satisfactory international joint venture performance in

corrupt host countries is higher when the foreign firm has a minority interest or an equally distributed ownership position.

4.2.2 Joint venture establishment

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included the contribution to national economic development, creating product diversity, but mainly the combining of local knowledge with global expertise, and gaining from the foreign partner’s technology, experience and capabilities. This shows that there is correspondence between these observed reasons, and the reasons as described by Hitt et al. (2000). From the nine Scandinavian cases, seven yielded a rationale from the local joint venture partner. These included gaining from the partner’s expertise, resources and financial strengths, but here the focus is not specifically on technological capabilities, but instead on combining expertise of both partner companies. However, the most important local partner rationale for the Scandinavian joint ventures was the tapping of market, product and industry opportunities. This difference in local partner firm rationale per region can be explained by the difference in region classification. While the local partner firms from North Africa classify as developing market firms, the local partner firms in Scandinavia are developed market firms.

Developed market firms value local market knowledge and unique competencies when selecting their alliance partner (Hitt et al., 2000). The foreign partners in the studied joint ventures are developed market firms. From the sixteen cases, twelve provided a foreign partner rationale for entering the joint venture. For the Scandinavian joint ventures, six foreign partner rationales were provided. Besides creating shareholder value, these mainly included expanding through tapping opportunities in the form of accessing the country, the sector and industry, developing and commercializing products and establishing a market presence. Also for the North African joint ventures, six foreign partner rationales were provided. The main reasons for these foreign partners to enter into a joint venture with a local partner were to gain from the local market knowledge, enter the country and gain access to the fast growing North African region. This corresponds with the reasons as described by Hitt et al. (2000). Thus, the examination of the different partner rationales support the conclusion of Hitt et al. (2000) because for the North African joint ventures, the reasons correspond for both, the foreign and local partner. The correspondence with their conclusions is not present for the Scandinavian joint ventures, the main reason for this being the non-existence of this distinction between developed market partner and developing market partner for the joint ventures established in this region.

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tapping shorter-term opportunities. A possible explanation for this phenomenon is the unfulfilled market opportunities offered by the North African region, as compared to the more mature Scandinavian market, since there are substantial investment opportunities in developing countries (Beamish, 2013). The market opportunities could have a weakening effect on the relationship between corruption and performance. If it is assumed that corrupt countries have untapped market opportunities, this could explain a better international joint venture performance in these areas. This leads to the following proposition:

Proposition 3: Market opportunities moderate the effect of host country corruption on

international joint venture performance.

4.2.3 Joint venture termination and failure

In total, from the North African joint venture cases, three out of seven have been terminated. From the Scandinavian joint ventures, five out of nine have been terminated. The differences in foreign partner rationale for entering the joint venture might explain this difference in termination between the two regions. Interestingly, partner conflict as a reason for IJV termination (Fey & Beamish, 2000) has not been observed in the cases. The reasons for termination were either a failing market or they were not disclosed. There has been no evidence to assume that the observed joint venture terminations were caused by a conflict between partners.

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While in 2015 PMI still disclosed Sweden as a country in which they had at least 15% market share, they did not disclose this in 2016, leading to assume that their market presence was reduced because the dissolved joint venture was not replaced by other business operations in Sweden. This leads to the following proposition:

Proposition 4: In developing countries, international joint venture termination is more likely

to result in other host country business operations for the foreign partner than in developed countries.

It is important to realise that the intention of this thesis is to examine international joint venture performance and host country corruption. Because corruption is a sensitive topic, not much information is available and links between joint venture termination and corruption were therefore missing. The case study succeeded in providing longevity information, reasons for joint venture termination, and gained insights into joint venture failures, but no evidence of an apparent link between joint venture performance and host country corruption was found. Proposition 4 makes inferences about country development levels and international joint ventures. However, since it has been established that corruption is high in low-income and developing countries (Olken & Pande, 2012), and because of the negative relationship between GDP per capita and corruption (Bentzen, 2012), assumptions about international joint ventures and country development levels can be extended to country corruption levels. Therefore proposition 4 can be translated into the following proposition:

Proposition 5: In corrupt countries, international joint venture termination is more likely to

result in other host country business operations for the foreign partner than in non-corrupt host countries.

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5. Discussion

5.1 Implications

By exploring international joint venture terminations in a corrupt region and a non-corrupt region, this thesis provides topic familiarity and initial insights on potential relationships between host country corruption and IJV performance. This has led to the establishment of propositions that can be used for future research. This thesis, examining international joint venture performance and host country corruption, also has certain managerial implications. Examining the influence of host country corruption on international joint venture performance can lead to the managerial realisation that country level factors like corruption can truly affect business level entities. This awareness within companies has become increasingly important because globalisation has substantially increased the likelihood that firms will encounter corruption in their business operations. Understanding the implications can consequently lead to actions in the form of extra managerial caution with regard to business operations in corrupt countries or the conscious decision to avoid operations in corrupt countries completely.

5.2 Limitations

This thesis has some limitations that should be noted. First of all, the multiple case study mainly uses documents as the source of evidence due to a lack of availability of other sources. When conducting a research, in order to increase objectivity and construct validity, multiple sources of evidence should be used (Yin, 2008). However, for this multiple case study it was difficult to acquire more data through other sources such as archives, due to a lack of availability of this confidential joint venture information. Therefore the construct validity is lower, the data might include biases and consequently the results should be interpreted with caution.

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tested using sixteen cases. This could be a potential explanation for why the results were not significant and hypothesis 1 was thus not supported. This is a limitation of this thesis because it is difficult to make structural inferences and significant conclusions based on only sixteen international joint venture cases. Therefore it is important to keep the exploratory nature of this thesis in mind.

The multiple case study is based on sixteen international joint venture cases located in Scandinavia and North Africa, with the foreign partner originating from the United States and the local partner originating from the host country. This limits the generalizability of the results because joint ventures established in other host countries and joint ventures with other developed market companies as foreign partner were not included. The case analysis partially deals with this generalizability issue because propositions were established which emphasizes the need for conducting future research before confirming any results.

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other hand it does not provide an explanation for the more joint venture terminations in Scandinavia as compared to North Africa.

Another point of discussion is related to the joint venture cases in North Africa. For this region, the joint ventures were established in Algeria, Egypt, Morocco, Libya and Tunisia. Interestingly, from the ten North African countries, these are the five most Northern ones. No direct link between this observation and corruption has been observed. Because, based on the WGI index by Kaufmann et al. (2010), the lowest control of corruption score is 0.96 for Libya and the highest is 55.29 for Tunisia. The countries with the highest and lowest level of corruption in North Africa are thus both included in the sample of the joint ventures. The control of corruption scores for the other five countries that did not yield any IJV cases, vary between 2.40 and 33.17 and thus do not substantially deviate. Therefore, corruption does not explain the described observation, and future research needs to be conducted in order to find potential reasons for the observation.

The next point of discussion is related to the interesting observation that the three terminated IJVs in North Africa were all established in the host country Egypt. No direct link between this phenomenon and corruption has been observed. Because, based on the WGI index by Kaufmann et al. (2010), the average control of corruption score for North Africa is 25.87. The control of corruption in Egypt is 35.10, which does not substantially deviate from the average and therefore does not provide any evidence for an apparent link between the terminated joint ventures and the corruption level. Since corruption does not explain the described phenomenon, future research needs to be conducted in order to find other potential reasons.

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5.3 Suggestions for future research

The purpose of this exploratory thesis was to gain initial familiarity with the relationship between host country corruption and international joint venture performance. The analysis lead to the establishment of propositions, and the suggestions for future research are closely related to these established propositions, as well as to the described limitations of this thesis.

The five established propositions are different in concepts, variables and relations, but they are all related and directed towards the relationship between host country corruption and international joint venture performance. Therefore, future research should investigate this relationship by examining the established propositions and potential other hypotheses that can be derived depending on the exact direction and focus of the researchers. The five propositions to be examined are thus; ‘host country corruption positively influences international joint venture longevity’, ‘the likelihood of satisfactory international joint venture performance in corrupt host countries is higher when the foreign firm has a minority interest or an equally distributed ownership position’, ‘market opportunities moderate the effect of host country corruption on international joint venture performance’, ‘in developing countries, international joint venture termination is more likely to result in other host country business operations for the foreign partner than in developed countries’ and ‘in corrupt host countries, international joint venture termination is more likely to result in other host country business operations for the foreign partner than in non-corrupt host countries.’

The testing of the five propositions should be done using a combined approach, containing both qualitative and quantitative research. Quantitative research is suitable for establishing certain phenomena, and is therefore applicable for determining whether a certain relation, as described by the propositions, is observed. The sample for the quantitative research should be substantial, in order to ensure the significance of the observed results. However, finding a causal effect or finding the actual role that corruption has played in these phenomena is complicated. Given the complexity of distilling the exact effect corruption has in these specific relations, or on performance in general, it is crucial to conduct qualitative research when examining these relationships.

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6. Conclusion

Host country corruption can have a negative effect on foreign companies aiming to establish operations in the host country because of the uncertainty, risk and ambiguity related to it (Uhlenbruck et al., 2006). When attempting to establish a presence in a corrupt host country, foreign firms will often decide to enter through means of an international joint venture with a local partner. This will lower the transaction costs of doing business in a corrupt environment because the local partner can contribute local knowledge, local contacts and can help the partner in gaining legitimacy in the foreign environment (Uhlenbruck et al., 2006). Simultaneously, the performance of many international joint ventures is often described as inadequate and unsatisfactory (Geringer & Hebert, 1991). This provided the ground for examining what the relationship between host country corruption and international joint venture performance is. Examining international joint venture performance through measures assessing financial performance can be challenging because financial data is difficult to acquire as it is only incorporated in the consolidated statements of the IJV partners (Pothukuchi et al., 2002). Therefore, international joint venture performance has been assessed by focussing on instability and failure. Instability is a main change in the relationship between the partners that was premature and unplanned from the perspective of at least one of the partners (Inkpen & Beamish, 1997). Because of the foreign partner perspective of this thesis, failure constitutes dissolution of the IJV or acquisition by the local partner or a third party, without replacement with an alternative business operation for the foreign partner in the corrupt host country. Longevity and dissolution are theoretically closely related because a dissolution date is needed for determining international joint venture longevity and it is therefore a suitable performance measure.

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partner trust, cultural differences and related partner conflicts (Fey & Beamish, 2000). This will need to be examined in future research.

The case study analysis provided multiple insights. Some of the insights and observations are not directly linked to the relationship between host country corruption and international joint venture performance. Namely, it has become apparent from the case study analysis that the partner commitment to joint ventures is lower than initially suggested by literature. Also, partner conflict did not appear to be a reason for international joint venture termination in the examined cases. There have also been observations and insights that do provide suggestions for the relationship between host country corruption and international joint venture performance. First of all, it has been observed and suggested that international joint venture performance in corrupt host countries will be more satisfying when the foreign partner has a minority interest or an equally distributed ownership in the joint venture. Furthermore, the foreign partner rationales in the joint ventures indicate long-term market presence as objective mainly for the foreign partners in the North African joint ventures, leading to the suggestion that market opportunities in these corrupt host countries might moderate the effect of host country corruption on international joint venture performance. Finally, for the North African international joint venture cases that have been terminated, the foreign partner is still present in the market through other business operations, while for the Scandinavian cases this is uncertain. This has led to the suggestion that in developing countries and corrupt countries, international joint venture termination is more likely to result in other host country operations for the foreign partner than in developed and non-corrupt host countries.

Overall from this thesis it can be concluded that it was difficult to answer the research question ‘What is the relationship between host country corruption and international joint

venture performance?’. Acquiring international joint venture information is complicated,

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The influence of host country corruption on international joint venture performance