Strategic Motives and Partner Selection Criteria in International Joint Ventures in Turkey PDF

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This article was downloaded by: [TÜBTAK EKUAL] On: 1 October 2009 Access details: Access Details: [subscription number 772815468] Publisher Routledge Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK

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Strategic Motives and Partner Selection Criteria in International Joint Ventures in Turkey Ekrem Tatoglu a; Keith W. Glaister b a Faculty of Economics and Administrative Sciences, Beykent University, Istanbul b Leeds University Business School, University of Leeds, Leeds, UK Online Publication Date: 21 July 2000

To cite this Article Tatoglu, Ekrem and Glaister, Keith W.(2000)'Strategic Motives and Partner Selection Criteria in International Joint

Ventures in Turkey',Journal of Global Marketing,13:3,53 — 92 To link to this Article: DOI: 10.1300/J042v13n03_04 URL: http://dx.doi.org/10.1300/J042v13n03_04

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Strategic Motives and Partner Selection Criteria in International Joint Ventures in Turkey: Perspectives of Western Firms and Turkish Firms Ekrem Tatoglu Keith W. Glaister

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ABSTRACT. This paper provides an analysis of two important aspects of international joint venture (IJV) activity between Western MNEs and local partner firms in Turkey. First, the strategic motives for IJV formation are investigated from the comparative perspective of Western firms and local partners. As liypothe ed a number of significant differences are found in the relative importance of strategic motives between toreign partncr firms and Turkish partner firms. Second, the paper considers criteria used by Western firms and Turkish firms when selecting IJV partners. As hypothesised a number of significant differences are found in the relative importance of selection criteria between foreign partner firms and Turkish partner firms. Third, the paper considers the relationship between selection criteria and strategic motives by examining a multiple regression model using the factors of selection criteria and the factors of strategic motivcs as dependent and independent variables respectively. There is some support for the hypothesis that the relative importance of the selection criteria varies with the strategic motives of the IJV. [Astide copies nvailrihle fbr a fee fi-otn The Hiiwor.th Dociitrieiil

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Dr. Ekrein Tatoglu is affiliated with Beykent University, Faculty of Economics and Administrative Sciences, Istanbul. Keith W. Glaister is Professor of International Strategic Management, Leeds University Business School, University of Leeds, Leeds UK. Address correspondeuce to: Prof. Keith W. Glaister, 11 Blenheim Terrace, Leeds University Business School, University of Leeds, Leeds LS2 9JT United Kingdom (E-mail: kwg~i-rlubs.leeds.ac.tik).

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J ~ ~ i r i iof a l Global Marketing, Vol. 13(3) 3000 0 2000 by The Haworth Press, Inc. All rights reserved.

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JOURNAL O F GLOBAL MARKETING

KEYWORDS. international joint venture, strategic motives, selection criteria, Turkey

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INTRODUCTION The last two decades have witnessed an unprecedented world-wide growth in collaborative activity between firms. One type of collaborative activity, the equity-based joint venture, differs from other forms of intcr-firm coll,‘I boration in that it involves the creation of a separate organisation or legal business entity that is formally independent of the parents (Pfeffcr and Nowak, 1976; Harrigan, 1986; Lynch, 1989; Shenkar and Zeira, 1990). An equity-based international joint venture (IJV), which constitutes the focus of this study, is defined as a JV with two or more partners of different nationality (inkpen and Beamish, 1997). IJVs are n o t a new occurrence in international busin however, the trend towards forming IJVs has become increasingly common since the 1970s (Hladik, 1985; Harrigan, 1986; Anderson, 1990) and they have been the most pronounced form of business organisation f o r multinational enterprises (MNEs) in developing countries (Beaniish, 1988; Schaan and Beamish, 1988). More Western firms are now opting for IJVs as a method for continued growth and survival in light of maturing local markets and increased international competition. While this growing trend in interfirm collaboration has been identified and well documented in the academic literature (Morris and Hergert, 1987; Gomes-Casseres, 1989; Glaister and Buckley, 1994; Beamish and Dclios, 1997a; Vonortas and Safioleas, 1997), it has also been reported in the literature that there has been a high rate ofjoint venture failures (Geringer and Hebert, 1991, Parkhe, 1993; Beamish and Delios, 1997b). Despite a high likelihood of IJV failure, market liberalisation in developing countries has emerged as a inajor phenomenon that has accelerated the growth in co-operative venture activity between MNEs and local private firms (Gillespie and Teegen, 1995). After many decades of experiment with heavy government involvement in the economy, many developing countries are embarking on market liberalisation programs to achieve an economic development based o n outward-oriented export-promotion strategies. Commensurate with the spread of market liberalisation, co-operative equity ventures have become increasingly important for promoting international busiTurkey, in this respect, is a good example of a developing country which has substantially transformed its previously inward-oriented economy towards 11 more outward-oriented market economy.

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After a long period of being ignored by foreign investors, since the early 1980s Turkey has moved into the foreign direct investment (FDI) spotlight, with the implementation of its radical economic liberalisation program. From the first adoption of foreign investment legislation in 1954 through to the late 1970s, there were about 70 firms operating with foreign capital ownership in Turkey. During this time toreign direct investment in Turkey was negligible. After substantially retorming its trade and investment regimes through the 198Os, Turkey succeeded in attracting ;I great deal of toreign investment which was harne d to its development program. According to tlie foreign investment report prepared by the General Directorate of Foreign Investment (GDFI) during the 1080-1995 period tlie number of foreign equity venture formations (FEVs) reached a total of 2,900 with the amount of cumulative FDI authorisations totalling $14,529 million (GDFI, 1995). This dramatic rise in foreign investment in Turkey, from a mere $228 million in 1980 to about $15 billion in 1995, represents foreign investors' confidence in the new economic policies as well as a recognition of the unique opportunities that Turkey presents to foreign investors. The US Department of Commerce recently placed Turkey among the ten Big Emerging Markets (BEMs) due to its high economic growth and a rapidly growing population (Garten, 1996). Being at the cross-roads of Europe, Central Asia and the Middle East, Turkey appears to be an attractive location for multinational investors by providing them with an easy access to all three markets. In terms of the various forms of FDI in Turkey the equity joint venture is the dominant form. A joint venture is defined here as an affiliate where foreign ownership fnlls between 10 per cent and 90 per cent. Affiliates with a foreign equity share-holding of less than 10 per cent are considered to be portfolio investments. An affiliate with foreign ownership of more than 90 pcr cent is viewed as a wholly-owned subsidiary (WOS).' Tuble 1 shows that from a total of 2,888 foreign equity ventures in Turkey as of the first quarter ot 199S, IJVs account for about 53 per cent of the total, with wholly-owned subsidiaries comprising nearly 43 per cent. In terms of the country of origin of FDI, foreign investments in Turkey are dominated by European countries (64%) by value of FDI followed by the USA (14%)). with the remainder mainly shared by the coiintrics from the Far East (9%) and the Middle East (4%) (GDFI, 19%). Table 1 shows, from the total of 2,888 FEVs recorded, more than half arc established with firms from European countries, around one-quarter of tlie total number of FEVs arc formed by firins from the Middle East and tlie Far East with less than 8 per cent from the USA. Despite this growing interest of Western firms towards investing in Turkey, particularly in tlie lorm of equity-based joint ventures, to date there has been relatively little empirical work that provides ;I detailed analysis of the strategic motives and partner selection for Western IJV formation in

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TABLE 1. Form of FDI by Country of Origin

Country of Origin Europe

USA Middle East Far East Other Grand total

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Overall percentage

Joint Ventures 888

Wholly-Owned Subsidiary

561

99

112

238

343

44

40

Poltfollo investments

Total

56

82

1,531

6

21 7

7.5

8

589

20.4

t

85

2.9

16.2

259

190

17

466

1,528

1.246

114

2,888

53.0

43 1

3.9

53 0

100

Source. GDFl Database. as of22 March, 1995

Turkey. Drawing o n a series of interviews with senior executives of 47 multinational and 21 local firms which were parents to joint ventures in Turkey, Demirbag, Mirza and Weir (199s) analysed the motives ot both foreign and local parent firms and some specific cliaracteristics of these collaborative alliances. Demirbag et al. (lC)c>5:4O)identified t o u r main motives (it thc foreign parcnt tirms: ’protection o f tcclinology/quality a w i r ance,’ ’risk reduction,‘ ‘partner’s local identity and knowledge,‘ and ‘cost reduction.’ They also identified tivc main motives of local tirms f o r JV formation, which showed some degree ot compatibility with the motives ot the loreign investors. These rnotivcs were ’enhancement ot competitiveness,‘ ‘transter ot complementary technology and knowlcdgc,’ ’~icccssto global markets,’ ‘access to foreign parent‘s complementary resources,’ and ‘risk sharing and incentives.’ Deinirbag et al. (199.5) did n o t consider the process of partner selection in IJV formation. Erden (1997) from a sainple of 1.50 IJVs operating in Turkey examined a number of facets of IJV tormation. In terms of partner selection criteria, Erden (1997) basically found that ‘reputation of the local partner,’ ‘existence of a coinmon philosophy between the toreign and local partners,’ ‘experience,’ ’market knowledge’ and ’financial strength’ of the local partner were the most important criteria f o r the foreign

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g o n these studies this paper provides an analysis of two important aspects of joint venture activity in the context of an emerging market economy, Turkey. First, the strategic motivation of IJV tormation is investigated trom a comparative perspective o f both foreign and local partners. The relative importance ot a set of strategic motives is identiticcl and discussed f o r both sets of partner tirms. This paper theretore presents new clata and new empirical insights into the strategic motivation ot Western MNEs forming

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co-operative equity ventures with local partner firins in Turkey. Second, although choice of an appropriate partner is crucial to the success of IJVs. relatively little research effort has been devoted to the crucially important process of partner selection, particularly from the viewpoint of both foreign and local partner firms. An increasing recognition of the niarket potential ot developing countries a n d the initiative of local firms in these countries necessitate a better understanding of local managerial attitudes towards forming joint ventures in thic context. This paper considers selection criteria for a sample of IJVs cstablished by Western MNEs and local firms in Turkey. Since an understanding ot the motivations and concerns of potential partners is required for a successful collaborative venture, this paper also attempts to provide evidence on the relationship between strategic motives for IJV formation and selection criteria. The valiic of this research lies particularly in its use of information and insights from multiple parties involved in an IJV, this is crucially important when examining IJVs that involve parent companies from dissimilar cultures (Osland and Cavusgil, 1998). The rcst of this paper is set out in the following way. The next section reviews the literature relating to strategic motives for IJV formation and partner selection, and sets out the hypotheses of the study. The research mcthoclology for the study is provided in the third section. The fourth section presents the results and discussion. A summary and implications arc in the I ast section .

zyxwvu LITERATURE REVIEW AND HYPOTHESES

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The Strategic Motivation for Iizteritational Joint Veizticre Formation

The theories used to explain IJV activity largely originate trom research and theory building in the areas of foreign direct investment and the inultinational enterprise. Although less emphasis has been given to IJVs (Beamish and Banks. 1987), there are some perspectives which provide particularly useful explanations of the motivations and choice of IJVs. These theoretical perspectives range from a mainstream economics orientation (Hladik, 1985; Contractor and Idorange, 1988), the transaction cost approach (Buckley and C m o n , 1988; Kogut, 1988; Hennart, 1988, 1991), resource dependency theory (Pfcffer and Nowiik, 1976: Pfcffer and Salancik, 1978), organisational learning (Kogut, 1988; Hainel, 199I), to explanations based on the strategic behaviour model (Contractor and Lorange, 1988; Harrigan, 1986, 1988). A number of authors (Mariti and Smiley, 1983; Harrigan, 1985; Porter and Fuller, 1986; Contractor and Lorange, 1988; Hatficld and Pearce, 1994; Glaister and Buckley, 1996) have provided several reasons for joint venture

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formation from a strategic perspective. Several of the same motives are identified by these authors, while some of the motives ovcrlap. Although the literature in international business has recently centred more on joint ventures formed between partners from developed countries, the underlying motives for joint venture formation may also apply to those formed in developing countries between a developed country MNE and a local private firm. The main elements of the motives identified in the literature are outlined below. Technological knowledge: integrating the complementary technologies of the partners to develop new products; acquisition of skills and know-how; exploitation of patents and RSrD (Berg and Fricdman, 1977; Contractor, 1986; Harrigan, 1987; Contractor and Lorange, 1988; Hladik, 1988; Hladik and Linden, 1989; Lynch, 1989; James, 1992; Hatfield and Pearce, 1904). RiJk sharing: hedging and lowering the risks of undertaking relatively large projects and developing new processes and technologies through pooling resources (Porter and Fuller, 1986; Harrigan, 1987; Contractor and Lorange, 1988; Lyons, 1991). Shaping competifion: influencing who a firm competes with and the basis of competition; defending current strategic positions against forces that are too strong for one firm to stand; blunting the abilities of competing firms to retaliate by binding potential enemies to the firm as partners (Porter and Fuller, 1986; Glaister and Buckley, 1996). Conzplementary re.\ oiirces: br i ng i ng together com p I eme n t ary s k i I Is and resources to create synergies, a result which is unlikely to be achieved by one firm acting alone (Awadzi and Chinta, 1988; Lorangc and Roos, 1991). MLzrket uccess: facilitating international expansion of one or more partner firms outside their domestic operations; serving the market quickly and effectively by capitalising on the combined skills and resources of partner firins (Morris and Hergert, 1087; James, 1992; Wrlters, Peters and Dess, 1994; Hatfield and Pearce, 1994; Glaister and Buckley, 1996). Ecoiiomies of scale: rationalising production through reducing average cost per unit, learning by doing and using the comparative advantage of each partner while avoiding the uncertainties and difficulties of full-scale merger (Mariti and Smiley, 1983; Contractor, 1986; Contractor and Lorange, 1988; Glaister and Buckley, 1996). Coilform to Iiost goverrinieiit policies: linking with local companies in order to accommodate host government regulations, e.g., ownership constraints, local content levels, export requirements, etc. (Killing, 1983; Contractor and Lorange, 1988; Gomes-Casseres, 1989; Hamill, 1989; Glaister and Buckley, 1996). To date, research on IJV activity in developing countries has largely focused on the objectives of foreign MNEs and has given little consideration to the strategic objectives of local firms mainly treating them a s passive partners

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(Li and Shenkar, 1997). While most of the mentioned motives can also be applicd to the joint ventures in developing countries, the underlying motives of developing country local parent firms may differ from those of developed country MNEs (Dacin, Hitt and Levitas, 1997). Transfer of technology and to new products constitute dominant reasons for companies in developing countries seeking joint ventures with foreign firms from technologically advanced countries (Beamish, 1987; Datta, 1988; Yan and Gray, 1994; Gillespie and Tecgcn, 1995: Li and Shenkar, 1997; Charman, 1998). Furthermore, the IJV can enable the local partner to purchase materials and equipment from the foreign partner, to explore international markets and also provides access to technical and managerial skills, and the international experience of the MNE vvhich. i n turn, tacilitates domestic marketing of the venture (Dcmirbag et al., 1995). IJVs arc also an important vehicle f o r local firms in dcveloping countries t o ncconiplish their ol>.jectives o f corporate growth and diversification (Simiar, 1983). The inject...