joint venture formation and internationalization: a japanese mnes' perspective
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Joint Venture Formation andInternationalization: A Japanese MNEs'PerspectiveJing'an Tang aa Sacred Heart University , Fairfield , ConnecticutPublished online: 29 Apr 2013.
To cite this article: Jing'an Tang (2013) Joint Venture Formation and Internationalization:A Japanese MNEs' Perspective, Journal of Asia-Pacific Business, 14:2, 107-129, DOI:10.1080/10599231.2013.746546
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Journal of Asia-Pacific Business, 14:107–129, 2013Copyright © Taylor & Francis Group, LLCISSN: 1059-9231 print/1528-6940 onlineDOI: 10.1080/10599231.2013.746546
Joint Venture Formation andInternationalization: A Japanese MNEs’
Perspective
JING’AN TANGSacred Heart University, Fairfield, Connecticut
This article investigates the dynamics of joint venture formationand performance during the internationalization process, usingdata on the international joint ventures formed by the 22 largestJapanese multinational enterprises (MNEs) over a 16-year period.Three themes emerged: (a) large multinational enterprises do notnecessarily seek a controlling equity holding in their subsidiaries,(b) the number of partners is affected by the risk profile of the tar-geted host country and previous international experience, and (c)controlling equity ownership and the greater the number of part-ners in the joint venture increase the likelihood of survival but donot significantly influence financial performance.
KEYWORDS internationalization, international joint venture,Japanese FDI, multinational enterprises, ownership structure,partner selection
INTRODUCTION
The equity joint venture (JV) is an important foreign investment entry mode(Gong, Shenkar, Luo, & Nyaw, 2007; Julian, 2008; Reus & Rottig, 2009).Joint venture is defined as a business entity where two or more partnersestablish a separate organization in which each partner holds a minimumequity stake of 5% (Killing, 1983). International joint ventures (IJV) are thosethat involve cross-border partnerships. Their formation and performance areof great interest to scholars and international managers.
With multiple theoretical lenses being applied, empirical studies haveidentified various factors that influence the formation and performance of
Address correspondence to Jing’an Tang, John F. Welch College of Business, Sacred HeartUniversity, 5151 Park Ave., Fairfield, CT06825. E-mail: [email protected]
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IJVs. However, the empirical investigations have yielded conflicting resultsin terms of the ideal design of an IJV leading to superior performance (e.g.,Reus & Rottig, 2009). Various explanations have been offered in previousstudies, such as complexity of IJV formation, biased theoretical fragmen-tation, inconsistent empirical design, and the like (Reus & Rottig, 2009;Robson, Leonidou, & Katsikeas, 2002). Adding to this research adventure,this study draws on the structural contingency theory and proposes that theconflicting findings are a result of the static research approach followed bymost previous studies—focusing on the phenomena at a particular point intime without considering the evolving nature of the organizational and envi-ronmental contingencies during parent firms’ internationalization processes.This perspective echoes with Buckley (2009) in that the Japanese multina-tional enterprises (MNEs) have evolved significantly since the 1980s whenthey first came to prominence. Moreover, JVs have played a major role ininternationalizing Japanese firms, which roughly accounted for 43% of theoperation modes among the Japanese foreign subsidiaries worldwide (Delios& Beamish, 2004).
We argue that IJV formation, as an organizational structure designedby its parent firms, follows a dynamic adaptation process. The ideal designof an IJV depends upon the internal and external contingencies during theinternationalization process of the parent firms. Particularly, this study aimsto answer two research questions through investigating the IJVs formed bythe largest Japanese MNEs:
1. Are there salient patterns that the large Japanese MNEs follow to buildtheir IJVs in terms of equity ownership positions and number of partnersduring the internationalization process?
2. What are the performance implications?
To answer these questions, the remaining article will firstly build a the-oretical foundation and hypothesize the relationships among IJV formation,IJV performance, and parent firm internationalization. This is followed byhypothesis testing using the historical data of Japanese MNEs. The testingresults are presented and reviewed with managerial implications drawn. Theanalysis concludes with a discussion of major findings, study implications,limitations, and directions for future research.
THEORETICAL FOUNDATION AND HYPOTHESES DEVELOPMENT
Despite firms’ increasing adoption of IJVs as a strategic foreign entry mode,there is a widespread concern with its formation and performance amongthe multiple theoretical lenses. Transaction cost theory argues that the ideal
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Joint Venture Formation and Internationalization 109
IJVs shall be structured in a way that the sum of production and transactioncosts associated with joint ownership is lower than that for sole ownershipor market transactions (Beamish & Banks, 1987; Gong et al., 2007; Hennart,1988; Kogut, 1988; Williamson, 1994; Zhao, Luo, & Suh, 2004). The resource-based view of the firm (Barney, 1991) suggests that IJVs that are formedto bundle valuable, rare, inimitable, and exploitable resources not otherwiseavailable to either partner can generate a competitive advantage and improveperformance (Beamish & Kachra, 2004; Chen & Chen, 2003; Contractor &Kundu, 1998). Knowledge-based view of the firm (Kogut & Zander, 1992)and organizational learning perspectives (Kogut & Zander, 1993; Lane, Salk,& Lyles, 2001) maintain that IJVs shall be formed to enhance organizationallearning, creating, and sharing knowledge (e.g., Jolly, 2002; Park, Giroud,& Glaister, 2009). Other theories such as real options theory (Kogut, 1991;Reuer & Tong, 2005; Tong, Reuer, & Peng, 2008), agency theory (Reuer &Miller, 1997; Reuer & Ragozzino, 2006), and social network theory (Burt,1992; Granovetter, 2005; Lin, 2001) offer their views on the ideal designof the IJV. However, as mentioned earlier, because researchers approach thesame phenomena from different theoretical angles, studies have yielded con-flicting results in ideal design (ownership structure and number of partners inparticular). In an attempt to explain the discrepancies, this research followsthe structural contingency theory (Donaldson, 1987, 2005; Pennings, 1987)and argues that the IJVs that can be aligned with the changing internal andexternal contingencies during the parent firms’ internationalization processwill achieve the best performance.
Structural contingency theory (Donaldson, 1987, 2005; Pennings, 1987)maintains that organizations are open systems that need to satisfy and bal-ance internal needs and to adapt to environmental circumstances. There isno one best way to organize. The ideal organizational structure dependson the kind of task and environment the organization is dealing with. Themost important concern for managers is to achieve good fits with variouscontingencies. For example, Drazin and Van de Ven (1985) found that work-unit design depends on the tasks the unit performed. Hui, Davis-Blake,and Broschak (2008) found that the effects of outsourcing structure onproject performance depend on the project stages. Ellis, Almor, and Shenkar(2002) pointed out the importance of including environmental and techno-logical uncertainties as organizing contingencies in the contingency model.Hollenbeck et al. (2002) examined simultaneously the effects of the internaland external fit on team structures.
Based on this theoretical perspective, we argue that the ideal design ofan IJV (achieving the best performance) is contingent on the changing orga-nizational and environmental situations during the internationalization pro-cess. IJV, as an important foreign entry mode, drives the internationalizationprocess, which in turn influences IJV formation and performance. This theo-retical framework is elaborated through the multiple hypotheses as follows.
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IJV Formation and Internationalization Process
Internationalization refers to the process of firms increasing their busi-ness involvement in the international market. Although there were born-international firms (Oviatt & McDougall, 1994), companies generally followa gradual process to expand their businesses to other countries (Johanson& Vahlne, 1977). The foreign operations start from culturally and/or geo-graphically close countries and then gradually move to culturally andgeographically more distant countries. In terms of market entry mode,they often begin with traditional exports and introduce more intensive anddemanding operation modes including JVs with time. Entry mode choiceis a balancing act between two critical issues, how many resources needto be controlled and committed to foreign operations. At the early stage ofinternationalization, firms tend to commit fewer resources at the expense ofcontrol of foreign operations. In later stages, more resources are committedto foreign operations as more control is exerted.
When it comes to the formation of JVs, this balancing act is quite sensi-tive. It lies in the middle of the control-resource continuum, with regulationbeing exerted through split equity ownership in the foreign operation andresource commitment shared with other partners. Used across all interna-tionalization stages, two of the most important strategic issues concerningIJV design are the control of, and resource commitment to, foreign opera-tions (Agarwal, Kuen, Herrmann, & Erramilli, 2004; Ding, 1997; Pan, 1997),which are reflected in two design variables: ownership structure and numberof partners.
Ownership Structure
Joint venture ownership structure has traditionally been defined by thepercentage of equity held by each partner and, in particular, held by for-eign parent corporations (Woodcock, Beamish, & Makino, 1994). An equityownership of above 50% is generally considered a controlling ownershipposition. Ownership structure represents a primary mechanism of control inIJVs (Li, Zhou, & Zajac, 2009). This has been the prevalent perspective inthe economic literature as well (Fama & Jensen, 1983). Specifically, somescholars assume that the extent of ownership equates to control (Grossman& Oliver, 1986). Anderson and Gatignon (1986) share a similar view andsuggest that the choice of ownership level reflects the interplay between thefirm’s desire to secure control and its attitude toward investment risk andresource commitment.
With respect to large MNEs, they are in a better position to make buyand make decisions (Beamish & Lee, 2003). There are also many otheradvantages of being a large firm (Hannan & Freeman, 1984). For instance,there is a greater flexibility and tendency to integrate operations on a regionaland global basis (Dunning, 1992). Compared with smaller firms, large firms
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Joint Venture Formation and Internationalization 111
have a higher bargaining power and ability to raise the needed resourcesand tend to control equity interest (Pan & Li, 2000).
Ownership structure and control issues are more sensitive for JapaneseMNEs (Buckley, 2009; Gerlach, 1992; Makino & Beamish, 1998a). They havea higher propensity to secure dominant ownership positions with JVs thanNorth American MNEs (Beamish & Delios, 1987). Pan and Li (2000) alsofound significant differences in patterns in ownership among Japanese, U.S.,and European MNEs in China, which led to the following hypothesis:
H1a: Large Japanese MNEs tend to have a dominant equity ownershipposition in their IJVs.
MNEs grow through a process of internationalization, from small tolarge. Upon first entering another country without experience in the localmarket, they tend to give up a dominant equity control position to localfirms in exchange for local knowledge (Beamish & Banks, 1987; Hennart,1991). Inkpen and Beamish (1997) suggested that local JV partners possessgreater bargaining power over, and are less dependent on, its foreign part-ner due to the limited knowledge of local market conditions. Therefore,in line with Johanson and Vahlne’s (1977) internationalization model, theequity ownership held by the Japanese MNEs depends on the stage of theirinternationalization, as follows:
H1b: IJVs formed by MNEs in their early internationalization stage tend tohave lower equity ownership than those formed at a later stage.
Number of IJV Partners
The choice of partners is another important issue in IJV formation (Gonget al., 2007; Makino & Beamish, 1998b). Most studies have focused onpartnerships between multinationals and a local firm where the underlyingassumption has been that JVs involve only two parent firms. The reality isthat many IJVs have more than two parents (Beamish & Kachra, 2004; Gonget al., 2007; Hu & Chen, 1996; Olk, 1997).
Although there have been several studies on the relationship betweennumber of partners and performance (Gong et al., 2007), few have examinedwhich factors influence the firm’s decision on the choice of partners. IJVs areformed to access complementary resources that are otherwise unavailableto the foreign parents. With this view, more partners mean a larger pool ofresources. As a result, firms prefer to involve more partners (Delios & Henisz,2003; Luo & Park, 2004; Rahman, 2008).
In addition to the resource argument, risk is another importantcontingency in forming JVs (Delios & Henisz, 2003; Rhee & Cheng, 2002).
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Uncertainties in the business environment or the parent firm’s lack ofknowledge of that environment create risk (Vernon, 1971). When there arepolitical, cultural, and social uncertainties in the host country, partners arechosen to diversify those risks. Political risks in the host country and cul-tural distance between home country and host country are two of the majoruncertainties that MNEs face during the IJV formation (Agarwal et al., 2004;Pan, 1997; Reus & Rottig, 2009).Vernon’s (1971) obsolescing bargain modelnotes the risks and uncertainties from the local government. From an MNE’sperspective, before the investment was made, the production cost deter-mined, and the market established, risk and uncertainty would be high forthe foreign company (Moran, 1985). The obsolescing bargain model also pre-dicts that the initially favorable investment agreement for the foreigner willlikely be subsequently renegotiated in favor of the host country (Delios &Beamish, 1999, 2004). Such political risks impose a threat to MNEs. In addi-tion to environmental uncertainties, another source of risk comes from firms’knowledge of the environment. When there isn’t enough international expe-rience or knowledge in the local environment, there will be higher perceiveduncertainties in the host country (Teece, 1986).
To avoid uncertainties, firms tend to engage more JV partners to spreadthe risks over multiple capital providers. Local partners can buffer the MNEfrom a host government, a function that reduces possible hold-up risks(Kogut & Singh, 1988). International experience accumulates with firms’internationalization process. Therefore, it is expected that IJVs formed at theearly internationalization stage have more partners than those formed later.
Consistent with the findings that ideal organizational structure is con-tingent on the complexity and magnitude of the task undertaken (Drazin &Van De Ven, 1985; Hui et al., 2008), it is expected that size of the subsidiaryor the amount of resources required to establish the subsidiary affect howmany partners are needed to perform the task and to overcome the risks.
In summary, these analyses lead to the following hypotheses:
H2a: There is a positive relation between the perceived political risk in thehost country and the number of partners in the IJV.
H2b: The more diverse the cultural distance between the host country andhome country, the more likely that the MNE will choose more IJV partners.
H2c: The greater the scale of the project, the more likely that the MNE willhave more IJV partners.
H2d: IJVs formed earlier by MNEs tend to have more partners than thoseformed later.
Performance Implications of Formation Strategies
Scholars have identified many factors that influence IJV performance. In acomprehensive literature review, Robson et al. (2002) integrated these factors
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Joint Venture Formation and Internationalization 113
into five sets of variables: (a) background variables (factors shaping thedomain of the venture partners), (b) antecedent variables (structural andprocedural aspects of IJV development), (c) core variables (factors pertain-ing to enterprise functions at the forefront of the IJV’s efforts to attain a highlevel of performance), (d) external variables, and (e) outcome variables. Herethe focus is on the antecedents—three strategic level IJV formation factors:equity ownership, number of partners, and internationalization stage.
Following the control argument of equity ownership (Li et al., 2009), iflarge MNEs have more than 50% equity ownership in their subsidiary, theywill arguably have controlling power in the IJV. This is a kind of ownershipadvantage as proposed in Dunning’s (1995) eclectic model. With controllinginterest, it will be easier to align the operation with their global strategyto achieve economy of scale and scope. On the other hand, holding moreequity also means more resource commitment (Beamish & Kachra, 2004;Gong et al., 2007). Large MNEs usually have more resources and abilityto contribute to the IJVs. In this case, the controlling equity ownershipwould lead to better overall performance, which supports the followinghypothesis.
H3a: IJVs with controlling equity holdings will perform better than those withlower equity holdings.
In terms of the effects of the number of partners on the IJV performance,two arguments are in favor of having a large number of partners: resourceavailability and risk reduction. When there are more partners, it is easierto draw complementary resources from different collaborators to achieve“one plus one higher than two” effects (Delios & Beamish, 2001; Reus &Rottig, 2009). In terms of risk reduction, increasing the number of partnersdiversifies the total risks and the firm is more likely to weather the ups anddowns in the host country environment. Also, the day-to-day managementresponsibilities can be delegated to the management team at the IJV. Parentfirms only step in when a critical or directional decision has to be made,making it possible to reduce high coordination costs. As such, the followinghypothesis is provided:
H3b: IJVs with a larger number of partners will perform better than thosewith a smaller number of partners.
The positive relationship between the parent firms’ international andhost country experience and foreign subsidiary performance has been wellestablished (Delios, Beamish, & Zhao, 2009). During the internationalizationprocess, MNEs have accumulated hands-on experience with a different hostcountry business environment and with the management of their IJVs. MNEs
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have more experience at the later years of their internationalization processthan at the earlier stages, creating the hypothesis:
H3c: IJVs formed at a later time will perform better than those formed earlier.
RESEARCH DESIGN
Data Source and Sample
The focal interest was to examine the IJV formation and performance of spe-cific Japanese multinationals during their internationalization process. Basedon the Fortune Magazine’s list of Top 50 Asian Companies, the 22 largestJapanese MNEs were identified (Table 1). Twenty-one of these compa-nies were founded before 1950, except for Mitsubishi Motors. This list wascross-validated between the 2001 and 2010 editions, with 18 of the originalinternational corporations used for this research remaining on the 2010 list.Four companies, Nissho Iwai, Ito-Yokado, Mitsubishi Motors and NipponMitsubishi Oil, dropped off the list due mainly to mergers and acquisitions.Given the complexity and uniqueness of financial service firms, they werenot included in the analysis.
Research has shown that the Japanese investment in China has evolvedthrough several stages since the early 1980s (Delios et al., 2009). Followingthe same vein, the Japanese foreign direct investment (FDI) outflow world-wide from 1980 until today can be divided into four stages: (a) the firstdecade (1980–1990) featured rapid growth, mainly due to China’s openingdoor to FDI in the early 1980s; (b) further expansion in the following 6 years(1991–1996) was propelled by the market-based economic reforms in India(1991), Russia and Eastern Europe (1990–1991), and Brazil (1992); (c) theyears between 1997 and 2001 were marked by significant slowdown due tothe 1997 Asian Financial Crisis; (d) the present decade (since 2002) has fea-tured a gradual recovery in Japanese FDI (Delios et al., 2009). Because thecurrent growth patterns are similar to the first decade (1980–1990), thoughat a slower pace, the insights gained from this study may be applied to thecurrent period. This study covers the first three stages (1985–2001).
The IJV data of the 22 largest Japanese MNEs were collected from infor-mation published in Toyo Keizai’s (TK) publication of Japanese OverseasInvestment (Kaigai Shinshutsu Kigyou Soran). This directory is compiledannually from public information as well as a survey of top-level Japanesemanagers in foreign subsidiaries. The coverage of the survey is extensive,and the data set includes almost the whole population of Japanese foreignsubsidiaries, which makes it a valid source of data for the study of JapaneseFDI (Delios et al., 2009; Hennart, 1991). Parent and industry level informa-tion was taken from the Analysts’ Guide that was matched to the parentfirms listed in the TK database. Country information came from the Global
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TAB
LE1
22La
rges
tJa
pan
ese
Firm
sin
Fortune
500
(Exc
ludin
gFi
nan
cial
Serv
ice,
Util
ityIn
dust
ries
)
Ran
k(2
001)
Ran
k(2
010)
Ran
kin
Fortune
500
(200
1)Ran
kin
Fortune
500
(201
0)Com
pan
yN
ame
Foundat
ion
Yea
rRev
enue
2001
($M
illio
n)
Rev
enue
2010
($M
illio
n)
11
105
TO
YO
TAM
OTO
R19
3812
0,81
420
4,10
82
912
146
MIT
SUBIS
HI
1950
105,
814
48,9
133
1013
164
MIT
SUI
1948
101,
206
44,1
204
1317
195
ITO
CH
U19
5091
,177
36,7
985
1823
244
SUM
ITO
MO
1920
77,1
4031
,063
615
2520
6M
ARU
BEN
I19
5071
,757
35,3
267
232
47H
ITA
CH
I19
2063
,931
96,5
938
637
69SO
NY
1946
60,6
0877
,696
93
4151
HO
ND
AM
OTO
R19
4958
,882
92,4
0010
545
65M
ATSU
SHIT
A(P
AN
ASO
NIC
)19
3654
,997
79,8
9311
458
63N
ISSA
NM
OTO
R19
3449
,555
80,9
6312
n/a
74n/a
NIS
SHO
IWA
I19
2843
,703
n/a
137
7777
TO
SHIB
A19
0543
,139
68,7
3114
1184
185
NEC
1900
40,7
9638
,591
158
8813
8FU
JITSU
1936
40,0
4450
,399
1614
141
201
MIT
SUB
ISH
IELE
CTRIC
1921
29,1
8336
,116
17n/a
161
n/a
ITO
-YO
KA
DO
1913
26,8
23n/a
18n/a
171
n/a
MIT
SUB
ISH
IM
OTO
RS
1970
25,5
98n/a
1916
190
216
CAN
ON
1938
23,9
3634
,292
20n/a
197
n/a
NIP
PO
NM
ITSU
BIS
HIO
IL18
8823
,521
n/a
2117
204
239
MIT
SUBIS
HI
HEAV
YIN
D.
1950
22,9
0531
,674
2212
229
191
NIP
PO
NST
EEL
1950
20,6
4537
,563
115
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Competitiveness Report. This combined information creates an ideal datasetto examine the evolution pattern of IJV formation and performance.
Sample Description
The final sample consisted of 3,021 IJVs of the top 22 Japanese MNEs, ofwhich 1,107 exited before 2001, and 1,914 survived through 2001 (Table 2).This exit ratio is in line with the overall exit rate of 40% for equity JVs(Makino & Beamish, 1998a). These Japanese corporations established nearly60% of their IJVs in Asian countries. Manufacturing subsidiaries accountedfor more than 50% of the total sample. A vast majority had more than twopartners, and some had as many as 10.
TABLE 2 Sample Descriptions
Joint Venture Frequency Percent
FoundationFrom 1985 to 1990 1025 33.93From 1991 to 1996 1521 50.35From 1997 to 2001 475 15.72Total 3021 100.00
RegionAsia 1772 58.66North America 563 18.64Europe 396 13.11Other regions 290 9.60Total 3021 100.00
IndustryManufacturing 1603 53.06Agriculture, forestry, mining 166 5.49Trading & transportation 737 24.40Service 515 17.05Total 3021 100.00
SurvivalExited before 2001 1107 36.64Survived to 2001 1914 63.36Total 3021 100.00
No. of Partners1 151 5.002 663 21.953 883 29.234 629 20.825 371 12.286 197 6.527 77 2.558 33 1.099 13 0.43
10 4 0.13Total 3021 100.00
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Joint Venture Formation and Internationalization 117
TABLE 3 Chi-Squared Analysis: Region versus Founding Period
RegionFounded in1985−1990
Founded in1991−1996
Founded in1997–2001
Asia 501 1 31248.88% 68.57% 65.68%
North America 280 1 5827.32% 11.24% 12.21%
Europe 161 189 4215.71% 12.43% 8.84%
Other (Oceania, Africa,Mideast)
83 1 63
8.10% 7.76% 13.26%
Total 1,025 1 475% within founded
category100% 1 100%
Pearson χ 2 = 167.21, df = 6, p = .000.Valid number of cases: 3,021.
Although hypotheses were not developed regarding Japanese MNEs’internationalization process in terms of geographic expansion, a descriptiveanalysis of the sample provided evidence for the internationalization processtheory (Johanson & Vahlne, 1977). As shown in Table 3, the geographicand temporal distributions in combination show that regardless of massivemarket availability in Brazil, Russia, and Eastern European countries duringthe 1991 to 1996 period, Japanese MNEs expanded mainly in Asia (from48.88%–68.57%) where culture and geographic space are close to the homecountry. When the 1997 financial crisis hit Asia, IJVs formed in Asia stillaccounted for 65.68% of the total portfolio.
Hypotheses Testing
Hypotheses 1 and 2 were analyzed using a cross-tab chi-squared test andlinear regression. Survival analysis using Cox regression (Fang, Wade, Delios,& Beamish, 2007) was applied, along with a hierarchical logistic regressionto analyze financial performance (Li et al., 2009), to test Hypotheses 3.
Defined Determinants of JV Formation
Equity ownership is defined by how much equity share large MNE par-ent companies hold. It is divided into three groups: holdings higher than50%, between 20% and 50%, and lower than 20%. Research demonstratesthat these categorizations have significant meanings and implications onthe survival of subsidiaries (Dhanaraj & Beamish, 2004; Li et al., 2009).
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From the accounting point of view, when holdings are over 50%, thesubsidiary’s financial report is consolidated with the corresponding parent.Equity holdings below 20% would be regarded as pure investment with min-imal engagement in operations. This categorization is also a clear indicatorof parent firm’s motivation in the newly formed JV.
Number of Partners
Firms that have an equity interest in the subsidiary are regarded as partnersin the IJV. In the sample used, approximately 73% of the JVs have three ormore partners.
Independent Variables
As theorized earlier, a firm’s strategic action on the JV formation would beinfluenced by the business environment in the host country, the size of theproject, and the timing of formation on the following independent variables.
Host Country Political Risk. The political risk ratings were obtained fromthe Global Competitive Report.
Cultural Distance. Measurement was computed from Hofstede’s mea-sures, outlined by Kogut and Singh (1988). The cultural distance is thesum of the standardized difference of Hofstede’s four attributes of culturaldifferences between Japan and host countries.
IJV Size. This was measured by two variables: log of total number ofemployees and log of total capitalization of the IJV. The logarithm was usedto ensure that the scale would not distort the beta coefficients.
Years from Founding. This variable is calculated by subtracting sub-sidiaries’ foundation year from the year 2001 to capture the time thesubsidiary was founded and the experience effects.
Step 2: The Influence of IJV Formation on Its Performance
Operationalization of the performance construct has become a critical issuein the international business literature. Some scholars use survival likelihoodas a proxy for performance, others apply financial measures. Subjectivemeasures, or objective numbers, have also been applied. In this study,survival and financial performance are employed to examine performanceimplications of formation strategy.
Exit or Survival. A binary variable indicating the year the subsidiaryexited earlier or survived to 2001. Exit was coded as 1, survival as 0.
Financial Performance. This measure is from the annual survey ofJapanese managers in the IJV subsidiaries. Three ratings include loss,breakeven, and profit. This study’s emphasis is in the probability of makingprofit; coded profit as 1 and loss and breakeven as 0.
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Independent Variables. The strategic level variables include equityownership, number of partners, and timing.
Equity Holding. This is a dummy variable used in Step 1. The controllingequity holding serves as the reference group and is then compared to otherequity positions effects on survival and financial performance.
Number of Partners. The same variable is used in the Step 1 models.Any firms that have an equity interest in the subsidiary are regarded aspartners in the IJV.
Region and industry are dummy variables. Four regions were identified:Asia, North America, Europe, and others. There were four broad industries aswell: manufacturing; agriculture, mining, and forestry; service; and trading.
RESULTS
First Step: Formation Models
The results for the first step models are shown in Tables 4 and 5. In Table 4,the cross-tab chi-squared model is significant at p = .003 level, indicatingthat the large MNE equity holdings in IJV subsidiaries depend on the found-ing periods, and the distribution across different equity holding categoriesare different. There were more IJVs in the minority holding categories (morethan 70%) than in the controlling equity group (approximately 24%), in directopposition to Hypothesis 1a. This finding suggests that very large MNEs didnot always have controlling equity ownership (>50%) in their subsidiaries.Hypothesis 1a is not supported. However, Figure 1 shows a general patternthat the noncontrolling IJVs (equity<20%) declined from more than 40% inthe first two stages to around 35%, whereas the higher equity holding cate-gories increased from 30% to nearly 40% (20%–50% equity-holding group) or
TABLE 4 Chi-Squared Analysis: Equity Holding versus Founding Period
Large MNEs Equity HoldingsFounded in1985–1990
Founded in1991−1996
Founded in1997–2001
Holding (<20%) 444 657 16743.79% 43.34% 35.23%
Holding (20%–50%) 307 511 18230.28% 33.71% 38.40%
Holding (>50%) 263 348 12525.94% 22.96% 26.37%
Total 1,014 1,516 474% within founded category 100% 100% 100%
Pearson χ 2 = 16.09, df = 4; p = .003.Valid number of cases: 3,004
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TABLE 5 Joint Venture (JV) Partner Formation Model
VariablesUnstandardized
CoefficientsStandardizedCoefficients Significance
Political risk 0.4 0.096 .000Cultural distance .072 .037 .069JV size1 (Log_equity) .072 .099 .000JV size2 (Log_temp) .101 .110 .000Years from founding .055 .138 .000Constant 1.282 4.761 .000
Dependent variable: No. of JV partners.Regression model: F = 29.201 Significance p = .000.
FIGURE 1 Equity Holdings versus Founding Period (color figure available online).
remained stable at around 25% (>50% group). The chi-squared test indicatesthis trend is significant. Therefore, Hypothesis 1b is supported.
Results of the regression model on the number of JV partners, as shownin Table 5, provided significant outcomes. Except for cultural distance, thebeta coefficients for other variables are significant (p < 0.05). Hypotheses2a, 2c, and 2d are supported. The results suggest when the targeting busi-ness environment is unfamiliar, the targeting country’s political risk is highand the projected JVs are larger in terms of employment and capitalization,and MNEs are more likely to team up with additional partners to share therisks. With respect to the internationalization stage, the earlier the JV wasfounded (as indicated more years from 2001), the more likely firms wereto choose a larger number of partners for their IJVs. Cultural distance hasno significant effect on the number of partners, and Hypothesis 2b is notsupported.
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Second Step: Performance Models
Table 6 records the Cox regression results for the survival analysis. Model1 was for controlling variables. Although political risk and cultural dis-tance did not have significant effects, industry and location do influenceIJV survival. Three independent variables (Models 2–4) were used to test thesurvival aspect of performance. Except for the timing variable (years fromfounding), equity holding and number of partners have significant effectson survival. Hypotheses 3a and 3b are supported: the noncontrolling equityholders are more likely to exit than the controlling holding IJVs. The higherthe number of partners, the less likely the IJV to exit held true. The survivalfunction plots in Figure 2 visually show the ownership effects on survival.Founding time does not influence exit likelihood; therefore, Hypothesis 3cis not supported.
Table 7 presents the results from the profit likelihood models, whichtested the financial aspects of performance. Model 1 includes the controlvariables. At the p < 0.05 level, only the region variable is significant. FromModels 2 to 4, three tested variables were loaded and demonstrated thatequity holdings are still significant. Negative beta coefficients reveal that for
TABLE 6 Survival Analysis (Cox Regression)
Exit = 1Variables Survival = 0 Model 1 Model 2 Model 3 Model 4
Country level Political risk .116 .136 .086 .045Cultural distance .021 .022 −.003 −.002Asia Reference groupNorth America .410∗∗ .485∗∗ .268∗ .269∗
Europe .285∗ .361∗∗ .236∗ .236∗
Other region .219 .254 .051 .045
Industry level Manufacturing Reference groupAgriculture,mining, & forestry
.877∗∗ .870∗∗ .850∗∗ .854∗∗
Trading .284∗∗ .310∗∗ .290∗∗ .288∗∗
Service .522∗∗ .503∗∗ .494∗∗ .503∗∗
Firm level E_hold (>50%) Reference groupE_hold (20%–50%) .483∗∗ .596∗∗ .600∗∗
E_hold (<20%) .179∗ .549∗∗ .554∗∗
# of partners −.377∗∗ −.377∗∗
Years fromfounding
−.014
χ 2 95.93∗∗ 130.32∗∗ 353.03∗∗ 354.75∗∗
Degree of freedom 8 10 11 12−2 Log-likelihood 14758.03 14505.15 14502.94 14502.94# of cases 3021 3021 3021 3021
Numbers are beta coefficients.∗p < .05 ∗∗p < .01.
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DURATION
1614121086420–2
Cum
Surv
ival
1.1
1.0
.9
.8
.7
.6
.5
.4
.3
LGPTN_E3
Equity holding (>50%)
Equity holding (20–50)
Equity holding (<20%)
FIGURE 2 Survival Function for Equity Holdings (color figure available online)
TABLE 7 Profit Likelihood Models (Logistic Regression)
Profit = 1Variables Loss = 0 Model 1 Model 2 Model 3 Model 4
Country level Political risk .451∗ .455∗ .464∗ .649∗∗
Cultural distance .411∗∗ .402∗∗ .402∗∗ .391∗∗
Other region Reference groupAsia .399 .444 .437 .430North America 1.239∗∗ 1.257∗∗ 1.252∗∗ 1.212∗∗
Europe 1.244∗∗ 1.260∗∗ 1.260∗∗ 1.201∗∗
Industry level Service Reference groupManufacturing −.389∗ −.285 −.280 −.205Agriculture, mining, &forestry
−.008 .084 .088 .213
Trading .001 −.030 −.027 .033Firm level E_hold (>50%) Reference group
E_hold (20%–50%) −.404∗∗ −.423∗∗ −.417∗∗
E_hold (<20%) −.057 −.066 −.029Number of partners .013 −.015Years from founding .052∗∗
χ 2 66.583∗∗ 77.015∗∗ 77.12∗∗ 86.53∗∗
Nagelkerke R2 .056 .065 .065 .073−2 Log-likelihood
1962.28 1951.85 1950.97 1941.57
# of cases 1914 1914 1914 1914
Numbers are beta coefficients.∗p < .05 ∗∗p < .01.
the group studied, the noncontrolling IJVs are less likely to be profitable thanthe controlling IJVs. The number of partners does not influence profitabilitybut the years in business (the timing effects) do positively affect the bottomline. For the firms that survived to 2001, the earlier founded IJVs were morelikely to be profitable than those formed later.
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DISCUSSION AND IMPLICATIONS
This study examined the relationships among IJV formation, performance,and internationalization based on a large sample of IJVs formed by the top22 Japanese MNEs in a 16-year period. Our overall contingency argument ofthe interdependency between ideal IJV design (in terms of performance) andinternationalization stages received strong support. This confirms that there isno one best way to structure an IJV with respect to the equity ownership andnumber of partners. It has to consider the organizational and environmentalcontingencies at the different stages of internationalization. This finding helpsto explain the conflicting results in the current IJV literature. This said, thereare several additional findings worthy of further notice as follows.
Additional Findings
First, contrary to the hypothesis that large MNEs tend to have controllingequity holdings in their IJV portfolios, the results indicate that more than70% of the IJVs in the sample had less than 50% equity ownership held bytheir main Japanese parent. This means that large Japanese MNEs do notnecessarily hold controlling equity ownership (>50%) in their subsidiaries.This finding may suggest that (a) large MNEs have diverse motivations andresource constraints to form IJVs and (b) equity ownership decision itself iscontingent on other factors such as size of the subsidiary and so on, whichactually provides further support of our contingency argument.
Second, the fact that approximately 40% of equity holdings in theIJV portfolios were less than 20% ownership may suggest that subsidiarycontrol can be exercised through nonownership mechanisms including for-mal contracts, management teams, and additional informal control methods(Buckley, 2009). This argument is more applicable for large MNEs becausethey have brand equity and other intangible assets that small partners do nothave. They can also exert control in the subsidiary without controlling equityownership (Beamish & Kachra, 2004).
Third, reviewing Tables 6 and 7 together, we can find that equity hold-ing exerts significant impact on survival and financial performance, whereasnumber of partners affects only survival but not financial performance. Morepartners increase the survival rate but do not significantly affect firm prof-itability. This is consistent with previous studies in that the determinants ofsurvival and profitability can be significantly different (Delios & Beamish,2001; Makino & Beamish, 1998a).
Implications
The rise of Japanese MNEs in the global arena has drawn much attentionfrom practitioners and scholars (Buckley, 2009); yet the understanding of the
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internationalization process leading to such a rise remains limited. By inves-tigating the IJV formation and performance of the 22 largest Japanese MNEs,this research paves the way to understanding the process. Japanese MNEsare quite flexible in equity ownership decisions, which reflect their diversemotivations in forming IJVs. This may also imply that because Japanese firmsare sensitive in controlling their foreign subsidiaries, the control mechanismsreach much further than through holding majority equity shares.
In line with the observation of “alliance capitalism” (Gerlach, 1992),this research shows that Japanese MNEs are well connected in their inter-national adventures, reflected by the large number of partners in the JVsformed overseas. Also important is that the IJV formation patterns and theinternationalization process are interdependent. Although IJV has been amajor mode for Japanese MNEs to help them rise in the international arena,the internationalization stage in turn affects the preference in structuring theequity ownership and choosing the number of partners.
This study also has implications for practitioners. When the targetedforeign market is riskier, more partners are desirable to increase the survivalodds. Meanwhile, managers should be aware that more partners do notnecessarily lead to better financial performance. In addition, the findingsadvise small firms that large MNEs do not necessarily hold controlling stakein their IJVs. They have multiple motivations. Being aware of this, small firmscan play with large firms to achieve their business interests in internationalstrategic alliances. These same insights can be drawn to help companies fromother countries to conduct business and form JVs with Japanese MNEs.
Study Limitations and Future Research
Due to data constraints, the findings of this study are limited to the JapaneseMNEs. However, the insights drawn from this study may help to understandIJV formation of Western MNEs and assist them to form JVs with Japanesefirms. “The principles governing their (Japanese MNEs’) operations are thesame as for Western MNEs and their evolution and strategy has much incommon with their Western counterparts” (Buckley, 2009, p. 318). Therefore,a logical next step is to replicate the study to analyze IJV formation patternsfor MNEs from Western and emerging economies.
The hypotheses were tested using Japanese IJVs formed before 2002.Such data constraints somehow limit the generalizability of these findings tothe recent decade. However, recent research shows that the present decade(since 2002) has featured a gradual recovery in Japanese FDI and the growthpattern has been similar to the decade (1980–1990) covered in this study,though at a slower pace (Delios et al., 2009). This increases the confidencethat the insights gained from this study may be applied to the current periodas well. Therefore, an important follow-up study is to test the theory usingthe most recent data.
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The analysis on financial performance in this study may have survivalbias. Further studies using longitudinal financial data would help avoid thislimitation. The binary logistic regression was used to examine firm financialperformance due to the categorical measure of the performance variablein the dataset. Future research should use objective financial performancemeasures.
CONCLUSIONS
Motivated by resolving the conflicting findings concerning the ideal designof an IJV, drawing upon the structural contingency theory and following adynamic perspective, we investigated the relationships among IJV formation,performance, and internationalization. It was argued that the relationshipsbetween IJV design variables including equity ownership and number ofpartners, and performance needs to be understood against the historicalcontext—internationalization stages. The empirical examinations of the IJVsformed by the 22 largest Japanese MNEs during a 16-year time span stronglysupport our augment. This study provides insights to resolve the contradic-tory results in previous IJV studies and also pave the way to investigate theevolution process of IJV formation and performance.
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