Factors affecting international joint venture success: an empirical analysis of foreign–local partner relationships and performance in joint ventures in Turkey PDF

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International Business Review 9 (2000) 1–35 www.elsevier.com/locate/ibusrev Factors affecting international joint venture success: an empirical analysis of foreign–local partner relationships and performance in joint ventures in Turkey a,* b Mehmet Demirbag , Hafiz Mirza a University of Inonu, Facul...

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International Business Review 9 (2000) 1–35 www.elsevier.com/locate/ibusrev

Factors affecting international joint venture success: an empirical analysis of foreign–local partner relationships and performance in joint ventures in Turkey Mehmet Demirbag a

a,*

, Hafiz Mirza

b

University of Inonu, Faculty of Economics and Administrative Sciences, Malatya, Turkey b University of Bradford Management Centre, Bradford, UK

Abstract This article discusses inter-partner relationships and their impact on joint venture performance. It explores the changes in the nature of relationships (conflict, commitment, co-operation, trust) which have important implications for the continuity and performance of partnerships. In doing so, it identifies the potential areas of co-operation and conflict, due to both partners’ overlapping interests, and establishes constructs which help explain conflict, commitment and other soft dimensions of joint venture operations. Based on previous studies, this article develops a framework within which inter-partner relations (conflict, commitment, trust, cooperation, and autonomy) are empirically examined. The article also establishes performance constructs for joint venture organisations. Finally, it develops a dynamic model of inter-partner relations and performance which indicates the causal connections between conflict, commitment, control, inter-partner co-operation and performance.  2000 Elsevier Science Ltd. All rights reserved.

1. Introduction The use of joint ventures (JVs) and co-operative forms in doing business domestically and internationally is scarcely new. They are among the oldest organisational forms in existence and were originally used as a commercial device by the merchants of Ancient Egypt and Mesopotamia to conduct overseas commercial trans-

* Corresponding author. 0969-5931/00/$ - see front matter  2000 Elsevier Science Ltd. All rights reserved. PII: S 0 9 6 9 - 5 9 3 1 ( 9 9 ) 0 0 0 2 7 - X

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actions. What is new in the modern era, however, especially since the 1970s, is the apparent growth in the frequency of the use of joint ventures, their geographic extent, and the unique issues and problems they raise because of their occurrence in an international and inter-cultural context. For example, Hladik (1985) estimated that by 1975 32% of US subsidiaries formed in developing countries were joint ventures. Similarly, Oman (1984) showed that in the manufacturing sectors of the ten developing countries in his sample, the most important new organisational form for investments was joint ventures. Morris and Hergert (1987) also noted that international joint ventures are as important as wholly-owned subsidiaries for foreign direct investment by US multinational enterprises (MNEs). The importance of international joint ventures (IJVs) as an organisational form used by OECD MNEs has been amply demonstrated in a range of further studies. Several other researchers have also stated that joint ventures, not wholly-owned subsidiaries, predominate in business organisations in less developed countries (Beamish, 1988; Connolly, 1984; Oman, 1984; D’Souza & McDougall, 1989; Demirbag, Mirza & Weir, 1993).1 Although recent research has detected an increased interest in joint venturing both in developed and developing countries, a large number of studies fail to address concepts that are theoretically central to the international joint venture relationship. Based on previous studies, this article develops a framework within which interpartner relations (conflict, commitment, trust, co-operation, and autonomy) are empirically examined. The article also establishes performance constructs for joint venture organisations. Finally, it develops a dynamic model of inter-partner relations and performance which indicates the causal connections between conflict, commitment, control, inter-partner co-operation and performance.

2. The research problem According to Buckley and Casson (1988), in so far as the general scope of cooperation is concerned, the international dimension per se is much less important than the inter-cultural dimension. Since the soft dimension of inter-firm co-operation is related to inter-cultural aspects of joint venture operations, then more attention should be placed on inter-partner relations than on other mechanisms, such as administrative procedures or contractual obligations, in fostering effective performance. They further argue that, although the role of nation states is paramount in the legal enforcement of contracts, with respect to their legislative and judicial systems, cooperation is ultimately a function of trust rather than legal sanction; and trust depends more on the unifying influence of the social group than on the coercive power of the state. Previous research revealed that, in joint ventures between Turkish industrial

1 Though not the focus of this study, it is worth mentioning that joint ventures were, arguably, harbingers of “alliance capitalism” and wider levels of co-operation between firms, for example in terms of R&D (Dunning, 1995; Narula & Dunning, 1998).

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groups and foreign MNEs, global consonance is as important as local compatibility for Turkish parent organisations (Demirbag, Mirza & Weir, 1995). Local parent firms may have various motives for creating joint ventures with foreign MNEs (Demirbag, 1994), but the drawbacks and hazards of such relationships are often overlooked in the process of formation (Mohr & Spekman, 1994; Zahra & Elhagrasey, 1994). In particular, according to Parkhe (1993), the areas of international joint venture conflict and performance are both very important and relatively under-researched. Parkhe (1993) notes that the “development of international joint venture theory centring around trust, reciprocity, opportunism, and forbearance can clearly provide the needed theoretical underpinning” for understanding their success or failure. He further argues that not only do these concepts reflect the behavioural variables at the heart of voluntary inter-firm co-operation, but they can also be linked effectively with each other along various dimensions. Relevant behavioural factors might include parent firms’ commitment to joint venture operations, inter-partner relations (e.g. inter-partner trust, long-term relationships, the autonomy of the joint venture), the degree of inter-partner conflict, and control. Drawing, in part, on existing research into inter-partner co-operation and conflict (Killing, 1983; Beamish, 1988; Geringer & Hebert, 1989; D’Souza & McDougall, 1989; Hyder & Ghauri, 1993; Parkhe, 1993), the purpose of this article is to operationalise and analyse the conflict, commitment, and performance dimensions of international joint ventures established between Turkish firms and foreign multinational companies.

3. Literature review and theoretical framework Increased international joint venture (IJV) activity has been seen as one of the major changes in international business environment in the past decade, and is popular means of entry for multinational enterprises (MNEs). This type of co-operative operation has also became an essential part of business strategies by local partners, particularly industrial groups, in developing countries. The literature concerning joint venture formation can be categorised into five major theoretical areas, namely, the transaction costs approach (Williamson, 1975; Hennart 1988, 1991), the internalisation approach (Buckley & Casson, 1976; Buckley 1991, 1993; Beamish & Banks, 1987), the competitive strategy approach (Porter, 1980; Lyons, 1991; Harrigan 1984, 1985), the organisational knowledge and learning approach (Hamel, 1991; Lyles, 1988), and the resource dependence approach (Pfeffer & Nowak, 1976; Pfeffer & Salancik, 1978; Anderson & Kheam, 1998). Each of these approaches makes predictions about the conditions under which joint ventures will be formed. This article, however, looks into post-formation factors associated with joint venture partnership success. For the purpose of establishing relationships between control, conflict, commitment and performance variables, we have utilised the framework outlined in Fig. 1. This framework is based on the premise that joint venture performance and, ultimately, partners’ satisfaction with operations will be affected by inter-partner conflicts, partners’ commitment to JVs and any imbalance in parent firms’ influence in

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Fig. 1.

Factors affecting joint venture performance.

formulating JV strategy. It is also a premise of the proposed framework that partnership attributes and performance aspects of joint ventures are multidimensional concepts which need to be operationalised effectively. Thus, the first objective of this article is to identify the underlying variables potentially explaining the attributes of JV partnership success. The second objective is to test the relationships between identified conflict, commitment, control and performance dimensions in order to elevate the discussion of international joint venture relationships to a higher-order investigation of positive and normative managerial issues and implications. 3.1. Inter-partner relations At the heart of the proposed research framework is what may be called the soft dimension of joint ventures. For the purposes of this paper, this dimension is labelled “inter-partner relations” and is comprised of factors such as inter-partner co-operation, inter-partner trust and long-term reciprocal behaviour. Buckley and Casson (1988) noted that the essence of voluntary inter-firm co-operation lies in “co-ordination affected through mutual forbearance”. Forbearance becomes possible only when there is reciprocal behaviour (Axelrod, 1984) and mutual trust (Thorelli, 1986), which in turn come about through an absence of opportunism (Williamson, 1985). According to many other researchers (Kanter, 1988; John, 1984), the core behavioural patterns of trust, co-operation and commitment create close ties which bind the two parties together. The literature has focused on trust, co-operation, autonomy and long-term relationships as important attributes of partnerships (Buckley & Cas-

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son, 1988; Kogut, 1989; Ring & Van de Ven, 1992; Parkhe, 1993; Hyder & Ghauri, 1989; Mohr & Spekman, 1994). The nature of the relationship (conflictual or co-operative, commitment or its absence) is likely to affect joint venture operations (Thorelli, 1986; Buckley & Casson, 1988; Parkhe 1991, 1993; Hyder & Ghauri, 1993). Anderson (1990) argued that inter-partner relations can be treated as a long-term performance dimension. Buckley and Casson (1988) pointed out that the discontinuation of forbearance by one partner in an agreement seriously impairs the other partner’s incentive to continue. They refer to co-operation as an output which leads to greater trust between parties and reduces the transaction cost of subsequent ventures in which they may be involved. Co-operation is efficient when a given amount of forbearance generates the largest possible amount of trust. Parkhe (1993) also argues that relationships based on trust, reciprocity and forbearance, with a minimal reliance on explicit expressions of good faith, diminish opportunism. Anderson (1990) argues that an indicator uniquely important to joint ventures is harmony among partners: this harmony is manifested in, among other things, coordinated efforts and good interpersonal relations. Harmonious partners do not guarantee a high performing joint venture, but it is difficult to imagine a venture that enjoys lasting success if partners are suspicious and conflicting (Anderson, 1990). 3.2. Inter-partner conflicts Inter-parent conflicts may occur in many forms. Conflict can be defined as “overt behaviour arising out of a process in which one unit seeks the advancement of its own interest in its relationship with others” (Habib, 1987). Conflict between joint venture partners can be viewed as a dynamic process consisting of latent, perceived, affective, manifest, and aftermath stages. Within these stages, manifest conflict is the activity dimension of conflict. Conflictual behaviour refers to overt activity such as written or oral exchanges expressing disagreement between two or more parties in a joint venture. According to Habib (1987), conflictual behaviour can range from passive resistance to overt aggression. Blodgett (1992), by using joint venture contract re-negotiation as a proxy for instability, found that joint ventures were more unstable when partners started out with uneven shares of equity and when the contracts had been renegotiated before. The contract re-negotiation is also more likely in relatively open economies than in countries that impose restrictions on foreign direct investment. The literature concerning inter-partner conflicts in international joint ventures indicates that joint ventures in developing countries are vulnerable to a range of issues, including strategic level, tactical level, and operational level issue.2 Examples of 2 These include issues such as differences in the major goals of the partners (Franko, 1971; Habib, 1987; Harrigan, 1987a,b, 1988a,b; Dymsza, 1988; Habib & Burnett, 1989; Hamel, 1991; Datta, 1988); perceptions of non-equivalent benefits and costs (Habib, 1987; Simiar, 1983; Harrigan, 1987a,b, 1988a,b); a lack of clarity in establishing the joint venture agreement (Roulac, 1980; Reynolds 1979, 1984; Brown, Rugman & Verbeke, 1990); conflicts over decision making, managerial process and style (Simiar, 1983; Habib, 1987; Turpin, 1993); differences in approaches to marketing (Reynolds, 1984; Harrigan, 1986;

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critical strategic issues which might make the joint venture relationship less stable include component sourcing (Reynolds, 1984; Habib, 1987) and the degree to which JV operations are interlocked with those of the parent companies (Habib, 1987; Habib & Burnett, 1989). Koot (1988) mentions that the venture may become a power in itself, or at least a third entity. In any case, the two parent companies can do their business independently of each other or through the venture. In a longitudinal study of joint ventures between Swedish MNEs and local Indian companies, Hyder and Ghauri (1993) found that inter-partner conflicts or co-operation may affect the performance of joint ventures. They also found that inter-partner relations (trust, co- operation, friendship) play an important role in the existence/nonexistence of inter-partner conflicts and, therefore, influence the parent firm’s perception of joint venture performance. 3.3. Control issues For many decades the topic of control has been a source of considerable discussion and thus it is not surprising to find a variety of approaches to conceptualising and operationalising control. While some researchers use partners equity share as indicator of control in joint ventures (Beamish, 1988; Janger, 1980), in some other studies parent firms’ influence on joint venture’s strategy is treated as the appropriate indicator of control. In developing countries, especially where local parent firms depend highly on foreign parent’s technology and marketing methods and knowledge, it seems that partners’ equity share in a joint venture should not be treated as a reliable indicator of control in IJVs (Demirbag & Mirza, 1996). Rather, partner’s influence on joint venture’s strategy formulation and implementation (Doz & Prahalad, 1984) is a better measure of control in such circumstances. Studies that considered the link between control and performance (Tomlinson, 1970; Janger, 1980; Killing, 1983; Schaan & Beamish, 1988) cast some doubt on the argument that a greater level of control by foreign MNEs in developing countries will lead to better performance by IJVs. Generally, when the focus of study shifts from developed to developing countries, the literature contains rather mixed findings between control and performance dimensions. In this study the concept of control is treated in terms of parent firms’ strategy formulation and implementation (Doz & Prahalad, 1984). As Martinez and Ricks (1989) put it, the extent of control of a parent company stems from both its formal

2 (Continued) Dymsza, 1988; Habib & Burnett, 1989); transfer pricing (Reynolds, 1984; Dymsza, 1988); expansion or diversification (Reynolds, 1984; Habib, 1987); human resource issues such as skills development, the assignment of managers and technicians, salaries and wages (Reynolds, 1984; Harrigan, 1986); communication between partners (Turpin, 1993); commitment (Turpin, 1993; Beamish & Lane, 1982); corporate amnesia (Turpin, 1993); a tendency to acquire skills rather than build the venture (Barret, 1992); a tendency to assume control whenever possible (Barret, 1992); cultural differences (Peterson & Shimada, 1978; Sullivan & Peterson, 1982); and parent firms organisational structures, organisational culture and personality clashes between partners and managers (Harrigan, 1986).

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authority and its ability to influence affiliates; the means used to achieve control come from the type of mechanisms and systems that a parent company is able to develop and implement. 3.4. Commitment Commitment can be described as the willingness of joint venture partners to exert effort on behalf of the joint venture relationship (Mohr & Spekman, 1994). Committed partners will consider long-term gains rather than short-term advantages. In such cases the frequency and intensity of conflicts can be expected to be relatively lower; and, therefore, higher levels of commitment should positively affect JV performance and partners’ satisfaction with joint venture activities. According to Mohr and Spekman (1994), a high level of commitment provides the context in which both parties can achieve individual and joint goals without raising the spectre of opportunistic behaviour. Lyons (1991)Beamish and Lane (1982) emphasise parent firms’ commitment to joint ventures as an important element of success. Buckley and Casson (1988) argue that commitment can be higher if the distribution of rewards from the venture, when successfully completed, is deemed equitable by all parties. Parent firm long-term commitment is also seen as a key factor by many authors for the continuation of joint ventures (Brown, Rugman & Verbeke, 1990; Buckley & Casson, 1988; Beamish, 1988; Hyder & Ghauri, 1993). Harrigan (1985) suggests that the need for the joint venture to co-ordinate with its parents is greatest when technology changes rapidly and hence the parents’ help is required in modifying technologies. According to Turpin (1993), joint ventures are very successful when partners avoid complexities, trust each other, and commit themselves heartily to the success of the new company. Harrigan (1984) argues that “the key to successful joint ventures will be a meeting of ...