the evolving value of foreign partnerships in - tamu.edu

THE EVOLVING VALUE OF FOREIGN PARTNERSHIPS INTRANSITIONING ECONOMIES

H. KEVIN STEENSMAUniversity of Washington

LASZLO TIHANYIUniversity of Oklahoma

MARJORIE A. LYLESCHARLES DHANARAJ

Indiana University

Through studying joint ventures during the early (1993) and late phases (2001) ofHungary’s economic transition to market economy, we demonstrate how institutionaland economic transformation alters foreign parents’ roles in the success of jointventures. Foreign parent decision influence and resource provision affected marketperformance and knowledge acquisition differently in the two phases. We conjecturethat the value of foreign partner involvement in a transition economy depends in parton the maturity of the transition.

Investment from foreign multinational firms hasplayed a vital role in countries transitioning fromcentrally planned to market economies, such as theCzech Republic, Hungary, and Poland. These coun-tries rely on such foreign direct investment as ameans of improving their overall technological andeconomic competitiveness. Because multinationalfirms often wish to hedge their risk in these rela-tively unfamiliar environments, foreign invest-ments most often occur through joint venture part-nerships with local firms (Beamish, 1994).

Foreign partner involvement in joint venturescan create value on a number of fronts. First andforemost, foreign partners can provide both criticalresources (e.g., product technology, operations,marketing) and their influence on how resourcesare deployed (Inkpen & Beamish, 1997). Indeed,such inputs may be essential for the early marketperformance and survival of a venture (Delios &

Beamish, 2001). At a deeper level, the contributionof resources and expertise can lead to a transfer ofknowledge from the foreign parent to the joint ven-ture (Argote, 1999; Steensma & Lyles, 2000). Tightcoupling between a joint venture’s partners can aidin the learning of tacit knowledge, and in the de-velopment of capabilities critical for the long-termcompetitiveness of the venture (Lane & Lubatkin,1998). Finally, the joint venture organizationalform creates value by facilitating the acquisition ofresources and knowledge in a manner that reducestransaction costs (Hennart, 1991; Kogut, 1988).Shared ownership establishes mutual forbearanceand decreases the need for elaborate contracts andclose monitoring (Parkhe, 1993).

Research exploring the link between parent in-volvement and the success of joint ventures hasgenerally taken a “resource-based” or a “learning”perspective (e.g., Das & Teng, 2000; Lane, Salk, &Lyles, 2001; Makhija & Ganesh, 1997). The focus ofthese perspectives tends to be the internal environ-ment of partner firms and their ventures (Das &Teng, 2000; Miller & Shamsie, 1996). Yet joint ven-tures, like all organizations, operate in a broaderinstitutional and economic context. The nature ofthis context is believed to have considerable influ-ence on exchange relationships in general (New-man, 2000; Peng, 2003). Consequently, we antici-pate that the state of the institutional and economiccontext will influence the role that foreign parentsplay in the success of joint ventures and is therebyimportant to consider when applying resource-

This material is based upon work supported by theNational Science Foundation under Grant No. 0080152.Any opinions, findings, conclusions, or recommenda-tions expressed in this material are those of the authorsand do not necessarily reflect the views of the NationalScience Foundation. In addition, we received supportfrom the U.S. Agency for International Development(Budapest), University of Washington CIBER and IndianaUniversity.

We thank Greg Bigley, Kathy Eisenhardt, CoreyPhelps, Melissa Schilling, and colloquium participants atthe University of Michigan for their insights on previousversions.

� Academy of Management Journal2005, Vol. 48, No. 2, 213–235.

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based and learning theories to international jointventures.

For example, in the case of transitioning econo-mies, the transition process brings about three sig-nificant changes that could arguably have directbearing on the value-creating aspects of interna-tional joint ventures noted above. First, local factormarkets eventually develop (North, 1990), poten-tially decreasing the relative value of foreign re-sources (Hanley, King, & Janos, 2002). Second, thecapacity and motivation for learning increaseamong local firms (Newman, 2000; Uhlenbruck,Meyer, & Hitt, 2003), potentially increasing theflow of knowledge from foreign parents to the localentity. Finally, market institutions become progres-sively more sophisticated and are able to facilitatearms-length transactions (Meyer, 2001; Peng,2003), potentially decreasing the value of the jointventure organizational form in terms of transactioncost reduction. The parallelism between the bene-fits of foreign parent involvement in joint ventures(i.e., resources and influence, knowledge transfer,limiting transaction costs) and the changes occur-ring in a transitioning environment suggest that asan economy evolves, so too will the means bywhich foreign partners create value in joint ventures.

In this study, we compared how the involvementof foreign partners creates value for their joint ven-tures early in an economic transition with theirvalue creation later in the transition. We used Hun-gary, a country that has seen dramatic changes overthe past decade, as our natural laboratory for study.We examined a sample of international joint ven-tures in operation relatively early in the Hungariantransition (in 1993) and also a sample in operationlater in the transition process (2001). Our analysismerges insights from in-depth interviews with richempirical survey data from the two time periods.By contrasting joint venture operations in a transi-tional economy over the course of nearly a decade,we provide a unique glimpse into how the value offoreign parent involvement changes as an institu-tional and economic context develops.

Like researchers before us (e.g., Das & Teng, 2000;Lane et al., 1997), we relied on the resource-basedand learning perspectives to examine the role thatforeign parent resources and their influence overthe deployment of resources have on venture suc-cess. However, we built on these perspectives byconsidering the state of the economic and institu-tional environment in Hungary and using it as acontingency variable. Specifically, we addressedthe following research questions: (1) Are the re-source inputs foreign parents provide more criticalto market performance and knowledge acquisitionduring the early phase of a country’s transition to a

market economy or later in the transition? (2) Arejoint ventures better served by dominant foreignparent decision influence early in a country’s tran-sition or by dominant foreign parent decision in-fluence later in the transition?

We ground our theory development in the re-source-based and organizational learning perspec-tives because their explanations of sustainable per-formance are complementary and are particularlyrelevant for transitioning economies (Uhlenbrucket al., 2003). The resource-based view addresses therole of unique and inimitable resources in marketperformance. Organizational learning attends toknowledge acquisition leading to the developmentof firm-specific and knowledge-based capabilitiesfor effectively deploying resources (Amit & Schoe-maker, 1993). Typically, long-term viability re-quires both resources and the knowledge-based ca-pabilities needed to deploy resources, particularlyin an increasingly dynamic environment(Makadok, 2001; Miller & Shamsie, 1996). It isknowledge-based capabilities that provide the flex-ibility to realign resources as markets change. Thus,the combination of resource-based and organiza-tional learning perspectives provides a more com-plete picture of the potential long-term viability ofthese ventures. Furthermore, transitioning econo-mies typically have underdeveloped resource fac-tor markets (Hoskisson, Eden, Lau, & Wright, 2000)and are in particular need of learning market-basedskills and capabilities in order to achieve long-termglobal competitiveness (Newman, 2000).

We contribute to the literature on internationaljoint ventures as well as to the resource-based viewand learning literatures. Our study provides addi-tional insight on the success of joint ventures intransitioning economies and complements researchby Lane and associates (2001), who found thatknowledge acquisition depended in part on thematurity of a joint venture. We suggest that the linkbetween foreign parent involvement and joint ven-ture success will also depend on the maturity of aneconomic transition. On the theoretical front, ouranalysis reveals that the applicability of the re-source-based and learning perspectives often usedto explain venture success depends in part on theeconomic and institutional context of the popula-tion being studied. Understanding these relevantcontingencies of our theories enhances future the-oretical developments (Dubin, 1979). Moreover, wefind that the resource-based view and learning per-spectives are complementary in predicting jointventure outcomes. Market performance and knowl-edge acquisition are shown to be empirically dis-tinct and have unique relationships with foreignparent involvement and economic context.

214 AprilAcademy of Management Journal

Specifically, our results suggest that foreign par-ent resources are more critical to joint venture mar-ket performance early in a transition than they arelater in the transition. In contrast, foreign parentresources have a stronger influence on knowledgeacquisition later in an economic transition thanthey do early in the transition. Foreign parent de-cision influence, however, is more critical forknowledge acquisition earlier rather than later. Ourresults have implications for both multinationalfirms entering transitional economies and policymakers within these countries.

THE HUNGARIAN TRANSITIONAL ECONOMY:EVOLVING INSTITUTIONS AND FACTORS

A country’s economic context can be character-ized in terms of its factors and institutions (North,1990; Spengler, 1957; Wan & Hoskisson, 2003;Wolf, 1955). Factors are that which is used in theproduction of goods and services. Changes in factormarkets for production inputs alter competitive re-lationships and a firm’s optimal scope (Porter,1985). Institutions facilitate the exchange of inputsand outputs among firms and establish the “rules ofthe game in a society” (North, 1990: 1). Institutionsgovern societal transactions in the areas of politics(e.g., corruption, transparency), the legal system(e.g., economic liberalization, regulatory regime),and society (ethical norms, attitudes toward entre-preneurship) (Scott, 1995).

In transitioning economies, institutions and fac-tor markets are in flux. Even though central plan-ning was abolished throughout Central and EasternEurope rather swiftly in the early 1990s, the con-struction of new economic rules and the revision ofinformal norms is an incremental process that takesyears (Child & Czegledy, 1996; North, 1990). Peng(2003) described a country’s transition from a com-mand to a market economy as a two-phase processconsisting of early and late phases. Despite a coun-try’s proclaiming the objective of becoming a mar-ket economy, its existing institutions in the earlyphase of an economic transition will be inconsis-tent with the needs of a market-driven system. Thelack of strong third-party enforcement will limit theability to form relatively impersonal, arms-lengthrelationships without enduring significant uncer-tainty and transaction costs. Optimal transactionswill typically be relationship-based and dependenton personal contacts. In the later phase of the tran-sition process, formal legal and regulatory regimesevolve in response to an increasing number oftransactions. Third-party enforcement graduallyemerges to dampen the uncertainty of the growingmarketplace. Simply put, the early transition envi-

ronment will be fraught with transaction costs be-cause of weak market institutions (North, 1990). Asmarket institutions develop and the costs of trans-actions are reduced, rule-based impersonal ex-change becomes increasingly viable (Peng, 2003).

Moreover, the development of institutions andfactor markets typically go hand in hand (North,1990). Modern economic growth requires the abil-ity to establish complex and transparent contracts.Without the confidence provided by mature marketinstitutions, firms lack the incentive to develop andsupply the necessary inputs for sustained eco-nomic growth. In sum, weak institutions and unde-veloped factor markets typify the early phase of aneconomic transition. Market-driven institutionsand relatively robust factor markets characterizethe late phase.

Hungary’s economic transition can be viewed inthese terms. Hungary began its transition from so-cialism to capitalism in 1989, following an acuteeconomic crisis and numerous failed reform at-tempts. The process involved changes in politicalpower (from a Marxist to a market-friendly politicalpower), property rights (from the state to privatehands), and coordination mechanisms (from bu-reaucratic to market coordination) (Kornai, 2000).As did other formerly socialist economies, Hungaryentered the 1990s with a shortage of inputs, owingto the ills of its socialist past. However, Hungary inparticular was burdened with excessive nationaldebt owing to the practice of what is referred to as“goulash communism” (Kornai, 1992). Followingthe 1956 revolution, the government borrowed ex-tensively to enhance the standard of living andmitigate the potential for social unrest. These grow-ing economic problems, together with a favorablepolitical environment, resulted in a peaceful shifttoward a democratic political system.

To reduce economic inefficiencies, the newlyelected government began privatizing state-ownedassets. Despite emerging inflation, unemployment,and other societal problems, privatization pro-ceeded relatively fast as Hungary needed hard cur-rency and debt reduction (Kornai, 2000). Moreover,pressure from the International Monetary Fund(IMF) and the European Union encouraged the par-ticipation of foreign investors (Hanley et al., 2002).By 2001, over 80 percent of local companies wereprivately owned, and Hungary had attracted one ofthe largest amounts of foreign direct investment inthe region (Sharp & Barz, 1997).

The Hungarian transition appears to be highlyconsistent with the two-phase model Peng (2003)elaborated. Table 1 is a comparison of institutionalquality early in the Hungarian transition (1990–96)with institutional quality later in the transition

2005 215Steensma, Tihanyi, Lyles, and Dhanaraj

(1997–2002). For example, the World Bank’s indexof regulatory quality indicates that Hungary’s reg-ulatory regime was much more consistent with amarket-driven system in the late phase of the tran-sition than it was in the earlier years. The index ofeconomic liberalization (de Melo, Denizer, & Gelb,1996) provides further evidence of Hungary’s com-mitment to free its markets from government con-trol during the 1990s (a rating of .57 in 1990, and of.93 in 1997; 0–1 scale). Corruption is a primarysource of contractual uncertainty (Stiglitz, 1995).Transparency International’s index of corruption,the level of dishonesty, bribery, and fraud in Hun-gary has waned significantly owing to the advent ofa more stringent legal regime (a rating of 1.6 in1990, and of 5.2 in 2000; 0–10 scale). According tothe World Competitiveness Report (IMD Interna-

tional, 1991), the transparency of the Hungariangovernment’s actions has also greatly improved,thereby reducing marketplace uncertainty. The factthat the private sector’s contribution to gross do-mestic product (GDP) increased nearly threefoldfrom the beginning of the 1990s to 2000 indicatesthat more market-friendly institutions had evolved.

Table 1 also provides a glimpse of the progressthat Hungary has made in its factor markets fromthe early to the late transition phase. The growthrate of the GDP, a common indicator of the devel-opment of economic factors in transition econo-mies, went from negative territory in 1991 to arespectable 3.8 percent by 2002. The number ofregistered incorporated firms likewise grew fromjust under 9,000 in 1991 to over 150,000 in 2001.

The development of human factors plays a par-

TABLE 1A Comparison of Institutions and Factors in Hungary for Various Yearsa

Variable Source and Measure

Transition Phase

Early Late

InstitutionsRegulatory quality World Bank Governance Indicators for 1996

and 2002; 0–2.5, “low quality” to “highquality.”

0.47 1.21

Liberalization index De Melo, Denizer, & Gelb (1996) for 1990and 1997; authors’ update for 1997; 0–1,limited to high liberalization.

0.57 0.93

Corruption index Transparency International for 1990 and2000; 0–10 “high corruption” to “lowcorruption.”

1.60 5.20

Government stability International Country Risk Guide for 1991and 2002; 0–12, “unstable” to “stable.”

6.00 10.00

Government transparency ranking World Competitiveness Report, IMD, for1994 and 1999.

43.00 13.00

Private sector as percent of GDP World Development Indicators, WorldBank, for 1991 and 2000.

30.00 85.00

Factor marketsConsumer price index World Development Indicators, World

Bank, for 1991 and 2000.35.00 9.80

GDP per capitab International Country Risk Guide, for 1991and 2002.

3,221.00 5,462.00

Real GDP growth International Country Risk Guide, for 1991and 2002.

�11.90 3.80

Number of registered firms Central Statistical Office, Hungary, 1991and 2001.

8,948.00 154,153.00

Growth in R&Dc OECD reports for 1993 and 1999. �8.50 3.50Total number of patent applications Hungarian Patent Office for 1992 and 2000. 9,070.00 62,562.00Quality of management ranking

(productivity, efficiency, marketculture)

World Competitiveness Report for 1995 and2000.

46.00 27.00

Entrepreneurship ranking A lower number indicates better quality 45.00 18.00

a A consistent set of years could not be used as the different sources from which we obtained data had different reporting periods.b U.S. dollars.c Percentage.


ticularly important role in an economy’s transitionby increasing the capacity and motivation of localfirms to learn (Newman, 2000; Uhlenbruck et al.,2003; Whitely & Czaban, 1998). There is ampleevidence of improvements in this regard (see Table1). For example, aggregated R&D is viewed as a keycomponent of a national capacity for learning(Dahlman & Nelson, 1995). Growth in R&D wentfrom negative in 1993 to positive during the latterhalf of the decade. The total number of patent ap-plications increased sixfold, indicating a greaterexperience base to build on for learning. An entre-preneurial ideology that encourages innovation fa-cilitates learning under times of intense change(Meyer, 1982). The World Competitiveness Report(IMD International, 1991) ranked Hungary 45th in1995 and labeled its lack of entrepreneurship as asignificant liability. By 2000, however, Hungarywas ranked 18th in the World Competitiveness Re-port, and entrepreneurship was considered one ofHungary’s strengths. The quality of local managershas also improved, going from a ranking of 46 to aranking of 27 between the years 1995 and 2000.

On the basis of the evolution of its institutionsand factor markets, Hungary’s transition can beroughly divided into an early phase (the early1990s) with weak institutions, undeveloped factormarkets, and a limited capacity for learning, and alate phase (the early 2000s) with relatively strongerinstitutions, developed factor markets, and anenhanced capacity for learning. Indeed, the Inter-national Monetary Fund (2000) suggested that Hun-gary had recently rejoined the ranks of middle-income countries and could claim to havetransitioned.

We explore how the importance of foreign part-ner involvement (i.e., resource provision, decisioninfluence) to joint venture success (i.e., market per-formance, knowledge acquisition) has also changedwith Hungary’s evolving institutions and factormarkets.

THE EVOLVING VALUE OFFOREIGN PARENT INVOLVEMENT

Market Performance

According to a resource-based perspective, afirm’s performance depends on both the resourcesit has at its disposal and its ability to deploy thoseresources effectively (Barney, 1991). Distinctive re-sources (e.g., technology, marketing, operations,etc.) merely provide opportunities. Whether or notfirms are able to take advantage of these resourcesdepends on the savvy decisions of those responsi-ble for their deployment. Indeed, there are numer-

ous examples of organizations with distinctive re-sources that have failed to successfully exploit them(Xerox and the resource of personal computer tech-nology is an example) (Alexander & Smith, 1988).

Foreign parents can provide critical resource in-puts as well as influence the manner in whichresources are deployed. In a broad sense, tangibleresource inputs and decision influence are all “re-sources” that can shape outcomes (Das & Teng,1998). However, resource provision and decisioninfluence are distinct (Mjoen & Tallman, 1997;Steensma & Lyles, 2001). A foreign parent can pro-vide financing, technology, and equipment whileallowing a venture significant autonomy. Contrar-ily, a foreign partner may provide limited resourcesand still have significant input in key decisions.Thus, we view “resource provision” and “decisioninfluence” as two different forms of foreign parentinvolvement.

Resource provision. Although a firm’s marketperformance is determined in part by the resourcesthat it has at its disposal, some resources are merely“table stakes” that put the firm on an equal footingwith its competition. Other resources are morevaluable and are difficult to imitate, and these en-able the firm to distinguish itself from its compet-itors (Barney, 1991). Foreign parents can be asource of valuable resources that provide a compet-itive advantage to a joint venture. Indeed, one of theprimary reasons for selecting a particular partner isthe package of resources that it brings to the table(Hitt et al., 2000).

However, the criticality of the resources a foreignparent provides may depend on the phase of thetransition process that a country is in. There is aresource gap between the local firms in a transition-ing economy and firms from more developed econ-omies (Svetlicic & Rojec, 1994). As shown above inTable 1, in Hungary’s early transition phase, thelocal factor markets were not well developed, andthe basic building blocks that could lead to someform of a competitive advantage tended to bescarce. In this phase, the resources that are avail-able locally are likely to be relatively easy to imitateand have little value in a competitive sense (Hosk-isson et al., 2000). Local firms are thus highly de-pendent on foreign firms for complementary re-sources that can be used to generate furtherdownstream resources that are valuable, unique,and difficult to imitate. Returning to the case ofHungary for an example, we quote an operationsdirector of a successful German-Hungarian autoparts joint venture, who described to us the extentand importance of its foreign parent’s inputs in theearly 1990s:


[The German owner] brought everything over here;he transplanted the entire factory. And you can takethis literally, that is, they brought the material, thesemifinished goods, the mechanical equipment, thetrucks, the warehouse racks, everything. . .we weresuited to this.

Local firms can potentially rely on arms-lengthmarket transactions as opposed to a shared equityventure to access critical resources from foreigntrading partners. However, in the early phase of atransition, the institutions that facilitate interfirmand arms-length transactions are not well devel-oped. Enforcement mechanisms that ensure con-tractual compliance are both weak and costly, andthe actions of trading partners are not readily trans-parent. Because of these transaction difficulties, thepotential to create value through tight affiliationsbetween firms is greater in environments wherethere are weak institutions than in environmentswith strong institutions (Khanna & Palepu, 2000).Close equity links between firms under weak mar-ket institutions can provide scale and scope econ-omies for firms in areas such as advertising, distri-bution, and know-how. Allying with internationalpartners can be used to overcome the inadequaciesof the strategic factor markets and institutions of alocal economy and provide a competitive advan-tage relative to those competitors that lack tightpartnerships with foreign firms.

As the transition toward a market economyprogresses and local factor markets develop, someof the resources provided by the foreign parent willno longer be as unique and difficult to imitate.Local external markets become a viable alternative.Even those foreign resources that cannot be sourcedlocally need not necessarily come from foreign par-ents per se. As institutions become more transpar-ent and contracts become enforceable, tight equitylinks between firms decrease in value (Peng & Luo,2000). Given the ability to form effective arms-length contracts, firms will become less concernedabout opportunistic behavior and will not be asrestricted in the type and number of exchange part-ners they can have. Ultimately, the benefits of part-nering as a means of acquiring resources may nolonger outweigh its costs and hazards (Peng, 2003;Robins, Tallman, & Fladmoe-Lindquist, 2002). In-deed, a joint venture’s overreliance on a foreignparent for resources can be an impediment to per-formance if resources can be more efficientlysourced from the external market.

In sum, as an economic transition progressesfrom the early phase to the late phase, the resourcecontributions of foreign parents, in conjunctionwith tight equity-based relationships that facilitatethese contributions, become less of an advantage

vis-a-vis those competitors acquiring resources with-out the help of foreign parents and tight relationships.

Hypothesis 1. Foreign parent resource provi-sion will have a more positive influence onjoint venture market performance in the earlyphase of an economic transition than in thelate phase.

Decision influence. Like the capacity to acquireresources, the capacity to make good decisionswith regard to the deployment of resources can bevaluable, rare, and difficult to imitate and can pro-vide a substantial competitive advantage (Barney,1991). However, the distinctive value of foreignparent decision influence and its affect on marketperformance will also likely vary over the course ofan economic transition.

The management capabilities and decision-mak-ing processes native to transitional economies aretypically not well developed. For one, experiencemaking business decisions among the local manag-ers is sparse because much of the decision makingin a command economy is centralized (Lau, 1998).Individuals with decision-making authority main-tain their positions because of their party loyalty asopposed to their managerial expertise (Cakrt, 1993).Moreover, any experience making business deci-sions is in the context of a state-owned enterprise.The managing director of a Japanese-Hungarianglass products joint venture described to us thelong-lived effects of managerial experience in state-owned enterprises:

In the beginning, [Hungarian] managers had diffi-culties since their experiences had been gained instate-owned companies. The knowledge acquiredthere couldn’t prepare them for the challenges oc-curring in the joint venture.

Indeed, IMD International (1991) noted noted thedeficiencies in competent senior managers as a sig-nificant detriment to Hungary’s growth.

Like managers in other Central and Eastern Eu-ropean economies, Hungarian managers at the be-ginning of the 1990s were also found to be short oninitiative and and long-term objectives (IMD, 1991).Managers in the early phase of a transition tend tobe undermotivated from working in a culture de-void of profit seeking. Simply placing these man-agers in a market context with market incentives isalso not effective. In their study of Russian privat-ization, Barberis, Boycko, Shleifer, and Tsukanova(1996) found that realigning management incen-tives alone did not lead to needed restructuring.Only after new managers and new owners were inplace did significant changes occur.

The ability to make decisions for a competitive


marketplace is valuable, rare, and difficult to imi-tate, particularly during the early phase of a transi-tion. The “rules of the game” will have recentlychanged, and the decision-making expertise of thelocal parents will not yet be aligned with thechanged competitive environment. The decisionexpertise offered by the foreign parent will be rel-atively unique and difficult to imitate early on andwill lead to a competitive advantage vis-a-vis com-petitors without the luxury of foreign partner deci-sion expertise.

As a transition progresses, local managers be-come trained in the ways of market economics andunderstand the efficacy of various managerial de-cisions within a competitive context. Numerousprivate business programs fill the need for profes-sional management acumen. These programs arebased on Western models that go beyond scientificmanagement and teach behavioral concepts (Mc-Nulty & Katkov, 1993).

In Hungary, local universities began providingMBA degrees based on a Western model starting inthe early 1990s. By the end of the decade, the MBAdegree became important for securing managerialjobs in subsidiaries and joint ventures of multina-tional firms operating in Hungary. Younger andmore appropriately trained managers have replacedthe older managers educated within a commandeconomy context. The managing director of anIrish-Hungarian agricultural equipment joint ven-ture described to us the key difference between theolder and younger Hungarian managers:

Unfortunately [Hungarian managers] don’t reallylike making decisions. It is more comfortable forthem if other people make the decisions for them.This is especially true for our older colleagues. Itisn’t necessarily true for the younger managers.

In sum, as a transition progresses, foreign parentdecision influence will become less critical to themarket performance of a joint venture.

Hypothesis 2. Foreign parent decision influ-ence will have a more positive influence onjoint venture market performance in the earlyphase of economic transition than in the latephase.

Knowledge Acquisition

One of the primary gains from foreign direct in-vestment into a transitional economy is the spill-over of knowledge from the foreign firms to thelocal firms (Caves, 1996). The mere presence offoreign firms, however, is no guarantee that knowl-edge transfer will take place. According to contem-

porary theories on organizational learning, thereare two requirements for acquiring knowledge.Above all, knowledge must be made available tothe potential target organizations. Much of theknowledge of foreign firms is embedded in theirproducts, technology, and general operations (Ar-gote, 1999; Mansfield, 1985). Thus, the degree towhich the foreign partners offer such resources pro-vides the potential for knowledge transfer. In addi-tion, for organizational learning to occur, thereneeds to be a learning environment where experi-mentation and risk taking is encouraged (Senge,1994). The savvy and influence of foreign partnerscan lead to a long-term vision and establishment ofthe learning systems necessary to acquire knowl-edge. However, the extent to which joint venturesin transitioning economies have the ability to learnfrom foreign parent resources and depend on for-eign parent influence to establish a learning envi-ronment will be contingent on what transitionphase an economy is in.

Resource provision. The foreign parent–jointventure relationship can be viewed as a teacher-student relationship (Lane & Lubatkin, 1998). Thetransfer of knowledge from a foreign parent to ajoint venture depends on the willingness of theteacher to provide resources as well as on the stu-dent’s aptitude for learning from those resources.The more willing and able a foreign parent is toprovide support in the form of resources such asequipment, technology, or marketing, the greaterthe opportunity for a joint venture to learn andinternalize the knowledge embedded in these re-sources (Hamel, 1991; Steensma & Lyles, 2000).

Although the provision of resources from a for-eign parent provides an opportunity for learning,resources alone are not sufficient. For students tolearn, they also need both the capacity and motiva-tion for learning (Cohen & Levinthal, 1990; Hamel,1991). Prior experience related to the incomingknowledge provides a capacity to absorb incomingskills and know-how from the foreign parent. How-ever, in the early phase of a transition process, fewlocal firms will have the prior learning experiencenecessary to fully exploit the opportunity forknowledge acquisition. The experience that the lo-cal firms do have will only be marginally relevantbecause the existing schemata that facilitate inter-pretation are specific to a planned economic sys-tem and are outdated. Indeed, Newman (2000)maintained that higher-order learning will be in-hibited when institutional upheaval is particularlyintense.

Motivation for learning is equally critical forlearning to occur (Dahlman & Nelson, 1995). Be-


cause of the lack of competition, there was littleincentive to gain new skills and expertise in theworkplace prior to the fall of the Hungarian social-ist system (Pavitt, 1997). Under this system, work-place success was based on connections and favorsrather than on expertise. Shortly after the collapseof Communism, distrust and an avoidance of re-sponsibility were widespread, particularly withinHungarian firms (Pearce, 1991). Because the risk ofbankruptcy was not clearly understood early on bythe local firms, the relationship between knowl-edge acquisition and organizational survival wasalso not appreciated (Grayson, 1998). In addition,local firm interaction with foreign multinationalfirms was limited in the early phase, and the con-cept of learning from partner firms was not in-grained in the local economy. Indeed, the jointventure as a structural form and the idea of knowl-edge transfer from partners was relatively novel.

Although many transition economies have strongformal academic systems, their educational sys-tems have typically done a poor job in preparingfuture employees for the demands of a market econ-omy (European Bank for Reconstruction and Devel-opment [EBRD], 2000). Early in the transition pro-cess in Hungary, foreign partners were welcomed,but local managers and employees clearly did notcomprehend the intensity of learning expectations.Forty percent of the large multinational investors inHungary noted the inadaptability of workers as asignificant obstacle to future development (EBRD,2000). The belief systems of local workers change ata much slower pace than do formal rules and reg-ulations (Peng & Heath, 1996). Thus, the norms andmotivation for learning will remain relatively weakin an early transition phase.

As a transition progresses, however, both the ca-pacity and motivation for learning develop withinlocal firms. In the case of Hungary, the economicliberalization and privatization that occurred dur-ing the mid to late 1990s facilitated knowledgeacquisition (Lane et al., 2001). The link betweenknowledge acquisition and survival became in-creasingly evident as market forces distinguishedbetween successful and unsuccessful firms. More-over, there is some evidence that a country’s ab-sorptive capacity relates positively to per capitaproductivity (Le Goc, 2002). Hungarian per capitaGDP has increased 60 percent during the decade oftransition. The growth in patent applications andimprovements in entrepreneurial capabilities pro-vide further evidence of an improvement in the ca-pacity and motivation to absorb knowledge (Table 1).

In sum, as an economic transition progressesfrom the early to the late phase, a joint venture willdevelop the capacity and motivation for learning

and will be better able to exploit the potential forknowledge acquisition from the resources providedby the foreign parent.

Hypothesis 3. Foreign parent resource provi-sion will have a more positive influence onjoint venture knowledge acquisition in the latephase of economic transition than in the earlyphase.

Foreign parent decision influence. Although weexpected the resource provision of a foreign parentto have a stronger relationship with knowledge ac-quisition during the late phase of a transition, for-eign parent decision influence will provide agreater payoff in terms of knowledge acquisitionduring the early phase.

Experimenting and allowing for failure are essen-tial for learning to occur (Argyris, 1991). In theearly phase of an economic transition, foreign man-agers from developed market economies will have adeeper appreciation than will local managers forthe critical role that knowledge acquisition andcapability development play in the long-term via-bility of ventures. Foreign managers will also bemore proficient at setting expectations, creatinglearning processes, and establishing a culture thatfacilitates knowledge transfer. Thus, the influenceand guidance of the foreign partner will be partic-ularly critical to the level of knowledge acquired bya joint venture in the early phase of the transition,when local managers are lacking in the ways ofmarket economics and an understanding of the im-portance of learning.

A Hungarian manager from a Japanese-Hungar-ian joint venture recalled the early effect of theJapanese partner’s influence:

I got to the firm in the best time—in 1991. After theperiod of reorganization, full of uncertainty, a veryintensive learning process started. The Japanesedeputy director working in the factory and otherJapanese leaders taught, controlled, and influencedour workers. They had strong and direct impact onattitudes.

Similarly, a senior manager of a food-processingjoint venture described how the heavy-handed in-fluence of the foreign parent in the early 1990s ledto the local company’s knowledge acquisitionwithin the realm of information systems:

They [the French partner] wanted and started thechanges. It was pressure since the introduction ofinformation systems required the learning and train-ing of individuals. We did not initiate this. It wasthe expectation of the French owner. They neededmore information and better access to it.


As a transition progresses and local managers be-come more in tune with competing in a market econ-omy, the difference in local and foreign managers’ability to appreciate and facilitate knowledge transferwill lessen. More local managers will develop exper-tise in establishing learning organizations.

One Hungarian manager from a German-Hungar-ian publishing joint venture demonstrated to us therelatively recent change in his attitude toward theimportance of learning:

In the old regime, if somebody learns something, it’senough for life. But now it’s not enough. You alwaysneed to learn and change. You must be able tochange.

Indeed, the quality of local management has im-proved precipitously between the early and latephases of many transitions, according to the WorldCompetitiveness Report (IMD, 1991; Table 1). Ulti-mately, the significance of foreign parent influenceto knowledge acquisition will wane in the latephase of an economic transition.

Hypothesis 4. Foreign parent decision influ-ence will have a more positive influence onknowledge acquisition in the early phase ofeconomic transition than in the late phase.

METHODS

Sample Selection

Hungary was selected as the setting for this studybecause in the early stage of its economic transitionit exhibited characteristics typical of the formersocialist economies, including an informal econ-omy, inaccurate reporting, slow decision making,and little market knowledge. Furthermore, of allthe Eastern Bloc countries, Hungary had and con-tinues to have one of the largest amounts of foreigndirect investment (Sharp & Barz, 1997).

We used a two-group cohort design to test ourhypotheses (Cook & Campbell, 1979). A randomsample of foreign-Hungarian joint ventures was ob-served in 1993. A separate and independent groupof foreign-Hungarian joint ventures was then ob-served in 2001. This design is particularly usefulwhen some cohorts receive a particular treatmentand a preceding cohort does not. In our case, thechange in institutional and economic context rep-resents the treatment. The advantage of this designis that there is “quasi comparability” (Cook & Camp-bell, 1979). In essence, the Hungarian context pro-vided us with a natural laboratory for studying howcontext influences key relationships between foreignparent involvement and joint venture outcomes.

We used a stratified sampling technique to gen-

erate the 1993 subsample. The stratified sampleconsisted of international joint ventures that wererepresentative of all firms in Hungary in terms ofindustry. The sample and sampling criteria weredeveloped with the assistance of a Hungarian gov-ernment agency that received information from thegovernment about joint ventures in Hungary. Sam-ple stratification was based on statistics providedby Hungary’s Central Statistical Office. The firmsthat participated were identified through directo-ries, contacts, and a database from the statisticaloffice. To be included in the sample, a joint venturehad to employ between 15 and 500 employees. In2001, a separate listing of joint ventures was nolonger available from the government. We deter-mined the joint venture population by workingwith the Hungarian Joint Venture Association andobtaining directories from the embassies of coun-tries that were major foreign investors (e.g., Austria,the United Kingdom, Germany, Switzerland, theUnited States, Italy, Japan, and France). We con-tacted each firm in these directories to determineits ownership structure and then contacted the gen-eral managers of joint ventures and asked them toparticipate in the study. By constructing the list ofjoint ventures in this manner, we came as close aspossible to sampling from the full population.

Data Procurement

Because mail and telephone surveys were likelyto have a poor response rate, we conducted per-sonal interviews to gather the data for our research.We minimized the chance of interviewer bias byusing a structured and standardized interview pro-cess and Likert-type scales for responses wheneverpossible. In brief, the structured interviews yieldedsurvey data on each joint venture’s founding, pa-rental involvement, and success. In addition, wesupplemented this survey data with in-depth inter-views of between four and eight managers at eachof eight joint ventures.

The research project involved cooperation be-tween one of the authors and a leading economicresearch institute in Hungary. The development ofthe survey instrument began in 1989 with qualita-tive interviews with joint venture managers. Fromthese interviews, basic constructs were identifiedand items were developed. U.S. and Hungarianmanagers were then asked to review the instru-ment. The instrument was pretested in Hungarywith a round of data collection in 1991. On thebasis of this data collection, we modified and im-proved the items. Prior to the 1993 data collection,the instrument was translated, back-translated, re-translated back into Hungarian, and reviewed at the


Hungarian research institute to ensure appropriatemeanings of the questions. We trained the inter-viewers and developed detailed instructions for theproject manager at the research institute. The inter-viewers were bilingual and could conduct the in-terviews in the language most suitable to the jointventure manager, but virtually all interviews weredone in Hungarian or English.

The informants were joint venture presidents orgeneral managers. Ideally, multiple informantswould have been used, and they would have in-cluded representatives of parent firms as well asrepresentatives of the joint ventures, but the sizeand nature of the study precluded such an ap-proach. Previous research provides support for re-lying on joint venture general managers for reliabledata. Geringer and Hebert (1991) found a signifi-cant correlation between a parent’s assessment ofan international joint venture’s performance andthat of the joint venture’s general manager. Pengand Luo (2000) found a high correlation betweenself-reported data and archival data in China. Child,Yan, and Lu (1997) also found significant interraterreliability among international joint venture manag-ers for the assessment of parental influence.

Telephone verification of joint venture statuswas followed by a letter to the general manager ofeach venture requesting that he or she participatein the study. The response rates for the two sampleswere 25 and 56 perecent, respectively. The mainreason managers gave for not participating was lackof time. The combined final sample included 241joint ventures (145 early phase, 96 late phase) forthe models involving knowledge acquisition. Be-cause of missing values, the combined final samplefor market performance was reduced to 225 jointventures (132 early phase, 93 late phase).1 The av-erage number of employees in the sampled jointventures was 113, and an average of five foreignexpatriates worked full- or part-time in a venture.The average level of export sales was 39 percent.These joint ventures fell into seven primary indus-try groups: chemicals (7%), electronics (9%), con-struction (8%), machinery and components (23%),food processing (7%), textiles (13%), and comput-ers/software (5%).2 The nations the foreign part-

ners came from included Germany (32%), Austria(20%), the United States (9%), the United Kingdom(6%), Switzerland (7%), and Italy (5%).

The type and extent of information collected inour project is unavailable elsewhere because jointventures, particularly in transitional economies, donot have stringent reporting requirements in termsof detailed information. Our survey, therefore, cre-ated a unique database on international joint ven-tures in Hungary.

Measure Validity

This study relied on data collected from singlerespondents, raising the possibility of commonmethod variance (Harrison, Mclaughlin, & Coalter,1996). We took steps to both limit and assess theseeffects. First, multiple-item constructs were used.Response biases have been shown to be more prob-lematic at the item level than at the construct level(Harrison et al., 1996). A post hoc analysis usingHarman’s single-factor test (Podsakoff & Organ,1986) also showed no evidence of artificial re-sponse bias.

We used confirmatory factor analysis with MPlusand maximum likelihood estimation to assess thepsychometric properties of the scaled items forconstructs derived from the survey instrument. Weused an iterative process to respecify the measure-ment model on the basis of both content and statis-tical considerations (Anderson & Gerbing, 1988). Asatisfactory fit was achieved (�2 � 717.46, df � 334,p � .01, RMSE � .07, CFI � .90). The ratio ofchi-square to the degrees of freedom is 1.55; a valueof less than 3 for this ratio indicates a good fit(Carmines & McIver, 1981). A CFI value of .9 orabove is also considered an indication of good fit(Bentler & Bonett, 1980). Although the chi-squarestatistic is still significant, the measurement modelwas considered acceptable, given the other sup-portive indexes (Anderson & Gerbing, 1988). Table2 reports the standardized coefficients, Z-statistics,and composite reliability values for the measure-ment model. We further assessed convergent valid-ity by examining reliability values and the amount

1 To maintain independence between the 1993 and2001 samples, we removed joint ventures from the 2001subsample that also appeared in the 1993 sample.

2 We can provide some indication of the relatedness(the similarity) between the operations and industry ofthe foreign parents and those of the joint ventures for the2001 sample. Our data show that 91 percent of the jointventures were similar in terms of operations and industry

to their foreign parents. This relatedness variable showedno relationship to knowledge acquisition in the 2001portion of the data, perhaps because of its constrainedvariance of the variable. Although unfortunately this in-formation was not collected for the 1993 data, we expectit would have been quite similar. International joint ven-tures in these emerging markets are typically extensionsof the operations of foreign multinational firms. Thus,the design and sample of the study somewhat controlledrelatedness.


of variance extracted from each factor by its com-ponents. The composite reliability values for theconstructs ranged from .87 to .89, all above thecutoff suggested by Bagozzi and Yi (1988). Thevariance extracted from each construct ranged from.50 to .65, all above the cutoff suggested by Fornelland Larcker (1981).

We assessed discriminant validity by comparingour target measurement model with various nestedmodels, moving from a highly restricted single-factor structure to a final, target structure that con-tained four factors (market performance, knowl-edge acquisition, resource provision, decisioninfluence). Chi-square difference tests for thenested models were consistently large and signifi-cant, showing that large improvements in fit weregained as we moved from restricted models to thetarget model (see Table 3). The mean correlationbetween the factors was 28.

Dependent Variables

Market performance. Survey data on marketperformance exhibit high validity (Venkatraman &Ramanujam, 1987). Thus, we measured market per-formance with a multiple-item survey measure.The respondent was asked how (1) key managers inthe Hungarian parent would rate the performanceof a joint venture (JV), (2) key managers in theforeign parent would rate the JV’s performance, and(3) the respondent him- or herself would rate theJV’s performance (1 to 5, “poor” to “excellent”). Afourth item was an aggregate measure of perfor-mance, in which the respondent was asked to ratethe firm’s performance for the last year in the fol-lowing seven activities: increase business volume,lower unit costs, increase market share, increaseemployee productivity, lower overhead costs,achieve planned goals, and make profits (1 to 5,

TABLE 2Characteristics of the Latent Variables

Construct/IndicatorStandardized

Coefficient Estimate/s.e.a ReliabilitybVarianceExtracted

Market performanceProjected Hungarian parent rating .89 .88 .65Projected foreign parent rating .78 13.97***Joint venture manager rating .85 15.56***Composite measure of joint venture manager .65 10.69***

Knowledge acquisitionTechnological expertise .79 .88 .55Marketing expertise .76 11.66***Product development .79 12.17***Knowledge of foreign cultures/tastes .60 8.97***Managerial techniques .76 11.68***Production processes .73 18.84***

Resource provisionProduct-related technology .72 .85 .50Operations-related technology .80 14.75***Operations support .74 9.51***Sales/marketing support .59 7.87***Administrative support .65 8.49***Training .70 9.24***

Decision influenceFinancing .62 .89 .59Product technology .79 9.14***Process technology .76 8.89***Operations .82 9.35***Sales/marketing .72 8.51***Managerial decisions .61 10.32***Administration .60 9.59***Pricing .80 9.20***

a For each construct, the coefficient of the leading indicator was set to 1.0 to establish the scale.b Denotes composite reliability.*** p � .001


“poor performance” to “excellent performance”;� � .82). Each of these four items was standardizedand combined. The composite reliability was .88.3

The Wilks-Shapiro test indicated that market per-formance for the 1993 and 2001 subsamples wasnormally distributed. In addition, Levene’s test forequality of variance was insignificant, suggestingthat the variances of the two subsamples were notsignificantly different. There was, however, a sig-nificant difference between the average market per-formance for 1993 and that for 2001 (p � .05). The2001 subsample, on average, had higher marketperformance.

Knowledge acquisition. We created an index ofthe knowledge that a JV had acquired from its for-eign parent (Lyles & Salk, 1996). Six items, eachwith the frame “to what extent have you learnedfrom your foreign parent” appraised technologicalexpertise, marketing expertise, product develop-ment, foreign cultures and tastes, managerial tech-niques, and production processes. The compositereliability was .88.4 The Wilks-Shapiro test indi-cated that market performance for the 1993 and

2001 subsamples was normally distributed. Lev-ene’s test also suggested that the variances were notsignificantly different. A t-test indicated that therewas no significant difference in the means ofknowledge acquisition for the two subsamples.

Foreign parent resource provision. Our six-itemmeasure assessed the extent to which a joint ven-ture received support from its foreign parent ineach of the following areas (1 to 5, “little support”to “strong support”): product technology, opera-tions technology, operations support, sales/market-ing, administrative support, and training. The com-posite reliability was .87. Empirical support for oneunderlying factor suggested that when parent firmsprovide resource support, they tend to use “pack-ages” containing all six of the resource types weasked about. These resources are inextricablylinked. For example, modern methods of opera-tions typically need to be combined with advancedmarketing and organization techniques to be fullyeffective (Milgrom & Roberts, 1990).

Foreign parent decision influence. We collectedmeasures of the degree of influence over specificareas and issues of joint venture management(Child, Yan, & Lu, 1997; Lin, Yu, & Seetoo, 1997).The joint venture managers were asked to evaluatethe influence that the Hungarian parent, foreignfirm, and JV managers had over eight issues bydividing 100 percent among the three groups. Theissues of interest included financing, product tech-nology, process technology, operations, sales/mar-keting, management decisions, administrative sup-

3 We were able to validate our measure of market per-formance for a subsample of our 2001 sample of jointventures. Hungarian joint ventures were required to re-port basic financial information to the Office of the Reg-istry for 1999. Sixty-five of the joint ventures in the 2001sample reported return on assets figures for this year. Thecorrelation between our perceptual measure of marketperformance and ROA was .41 (p � .01). This correlationprovides some evidence of convergent validity. Unfortu-nately, financial information for joint ventures operatingin the early phase of the Hungarian transition was notrequired.

4 In addition to completing the six-item scale, eachrespondent for the 2001 sample also selected one of tenpossible pictorial depictions of the process of knowledgeacquisition from the foreign partner over time. These

depictions were analyzed and coded into three categories(1 � “little knowledge acquired,” 2 � “some knowledgeacquired, 3 � “extensive knowledge acquired”). Thismeasure had a .62 correlation with the knowledge acqui-sition scale and provided some evidence of convergentvalidity.

TABLE 3Nested Models Assessing Discriminant Validity

Model CFI �CFI �2 ��2

1. Four-factor model .92 514.272. Single-factor model .67 1,393.61

Difference between models 2 and 1 .25 879.34***3. Three-factor model combining

resource provision and foreignparent decision influence

.84 772.31

Difference between models 3 and 1 .08 258.04***4. Three-factor model combining

market performance andknowledge acquisition

.79 975.25

Difference between models 4 and 1 .13 460.98***

*** p � .001


port, and pricing decisions. The values on theseissues for the foreign parent were combined. Thecomposite reliability was .89.

Transition phase. A dichotomous variable wasused to indicate the sample to which a joint venturebelonged. A 0 indicated a member of our earlytransition phase sample (the 1993 data), whereas a1 indicated a member of our late transition phasesample (the 2001 data).

Control Variables

Age. Older ventures may have overcome the lia-bility of newness and may have benefited from afirst-mover advantage. To control for and assess thepotential for survivor bias and first-mover advan-tage, we controlled for the age of a venture.

Size. Larger ventures may have certain advan-tages, such as economies of scale and marketpower, that may influence performance (Hambrick,MacMillan, & Day, 1982). Larger firms may alsohave excess slack that allows for experimentationand learning (Hedberg, 1981). We controlled for thesize (number of employees) of a joint venture.

Hungarian equity. Ownership structure hasbeen shown to influence both the learning andperformance of an international joint venture(Child, 2002; Lyles & Salk, 1996). We controlled forthe level of Hungarian equity in all models.

Industry. Ventures in certain industries may beinherently better performing than ventures in otherindustries owing to structural differences. We createddummy variables to account for industry differences.

Export sales. Firms that rely on exports may bemore likely to develop capabilities for learning andmay be less dependent on the whims of a domesticmarket (Newman, 2000). We controlled for exportsales as a percentage of overall sales.

Nationality of foreign partner. The multination-als from the various countries in our sample mayhave differed in their cultural similarity and effec-tiveness in partnering with Hungarian local firms.We created dummy variables for the six mosthighly represented countries in our sample.

RESULTS

Primary Analysis

Table 4 reports the means, standard deviations,and correlation coefficients between the depen-dent, independent, and control variables. We usedhierarchical moderated regression models to testthe hypotheses. We centered our measures of re-source provision and decision influence prior tothe regression analysis and ran separate models for

our two dependent measures. Interaction terms be-tween the variables of interest and the dummy vari-able for transition phase were created. We com-pared restricted regression models without theinteraction terms to full regression models to assessmoderation effects. This comparison is a relativelyconservative test of moderation, particularly whenused to assess small samples and models in whichthe moderator is a categorical variable (Stone-Ro-mero, Alliger, & Aguinis, 1994). Collinearity diag-nostics indicated that multicollinearity did not ad-versely affect the models (Belsley, Kuh, & Welsch,1980). Table 5 reports the results of the hierarchicalregression models.

Our analysis showed a significant, positive rela-tionship between transition phase and market per-formance (p � .05), suggesting that the performanceof our 2001 subsample of joint ventures was en-hanced overall by improvements in economic andinstitutional conditions.5 The change in explainedvariance between the restricted model and fullmodel was significant for both dependent mea-sures. This finding supported the contention thatthe transition phase of the economic context of ajoint venture moderated the relationship betweenforeign parent involvement and joint venture mar-ket performance and knowledge acquisition.

Hypothesis 1 states that foreign parent resourceshave a stronger influence on market performance inthe early phase of a nation’s economic transitionthan in the late phase. The coefficient of the inter-action between foreign parent resources and tran-sition phase was significant for market perfor-mance (p � .001). To gain further insight into themoderation effect, we plotted the interaction effectfor the regression model using one standard devia-tion above and below the mean of the interactingvariables to establish end points. We calculated thesignificance of the simple slopes (Aiken & West,1991). Figure 1a shows the relationship between for-eign parent resource contribution and performance.During the early transition phase, the relationshipbetween resource provision and market performance

5 The insignificance of our age control variable is note-worthy and suggests the absence of a survivor bias orfirst-mover advantage. Experience in this relatively vol-atile environment may not offer the performance pre-mium that it does in more advanced and predictableenvironments. Indeed, one could question whether thereis a late-mover advantage. Perhaps the better foreignfirms waited until later to enter the uncertain Hungarianeconomy, leading to a possible sample selection bias. Weconsidered this possibility and examined the relation-ship between age and market performance in the 2001sample. We found no relationship.


was positive and significant (p � .001). However, therelationship was not significant during the late tran-sition phase. Hypothesis 1 was supported.

Hypothesis 2 states that foreign parent decisioninfluence has a stronger influence on market per-formance in the early phase than in the late phaseof an economic transition. The coefficient associ-ated with the decision influence–transition phaseinteraction was not significant. Hypothesis 2 wasnot supported.

Hypothesis 3 predicts that foreign parent re-sources have a stronger influence on knowledgeacquisition in the late phase of economic transi-tion. The coefficient associated with the interactionbetween foreign parent resources and transitionphase was significant (p � .05). Figure 1b showsthe plot for this interaction effect. The provision offoreign parent resources was positively related toknowledge acquisition during the late phase of thetransition (p � .001). However, the same relation-ship was not significant during the early transitionphase. This finding supports Hypothesis 3.

Hypothesis 4 predicts that foreign parent deci-sion influence has a stronger influence on knowl-edge acquisition early in economic transition. Thecoefficient for the interaction between decision in-fluence and transition phase was significant (p �

.01). Figure 2 shows the positive relationship be-tween foreign parent decision influence andknowledge acquisition in the early phase (p �.001). This relationship was not significant duringthe late phase of the transition. Hypothesis 4 wassupported.

Post Hoc Analysis

Our confirmatory factor analysis provided evi-dence that the categories of resources (e.g., technol-ogy, sales/marketing support) we measured repre-sented one underlying construct, as did thecategories of knowledge (e.g., technological exper-tise, managerial techniques). However, we con-ducted further analysis to see if our results wererobust at the category level.

It could be argued that the resource categorieshad varying levels of inimitability. We disaggre-gated our measure of resource provision and cre-ated separate market performance models using in-teraction terms containing the individualcategories of resources (for instance, product-related technology interacted with transitionphase). In all cases, the interaction terms were sig-nificant and negative, indicating that each of theseresource categories was more critical to market per-

TABLE 4Correlations for Dependent, Independent, and Control Variablesa

Variables Mean s.d. 1 2 3 4 5 6 7 8

1. Market performance �0.20 3.432. Knowledge acquisition 15.16 7.06 .123. Age 6.00 3.26 .06 �.034. Size 113.17 185.93 .20** .08 .18**5. Hungarian equity 50.02 21.84 �.19** �.29** �.07 �.026. Chemicals/pharmaceuticals 0.07 0.25 .01 .08 .03 �.08 .047. Electronics 0.09 0.29 .04 .08 �.04 �.06 .05 �.098. Construction 0.08 0.27 .08 �.06 .07 �.05 �.03 �.08 �.099. Financial services 0.03 0.19 .05 �.06 .08 �.01 .03 �.05 �.06 �.06

10. Computers/software 0.05 0.23 .02 �.06 .00 �.01 .03 �.06 �.08 �.0711. Machinery 0.23 0.42 �.06 .08 .05 �.11 .00 �.15* �.18** �.16*12. Textiles 0.13 0.33 �.01 .10 �.20** .14* �.02 �.10 �.12 �.1113. Food processing 0.07 0.25 �.08 �.12 �.10 .09 .06 �.07 �.09 �.0814. Export sales 39.10 36.68 .03 .16* �.03 .13* �.05 �.05 .04 �.1115. United Kingdom 0.06 0.23 �.07 �.07 .04 .05 .07 �.07 .05 �.0716. United States 0.09 0.28 �.03 �.06 .11 .04 .14* �.02 .01 �.0417. Germany 0.32 0.47 .01 .13 �.08 �.04 �.04 .01 �.05 .0518. Austria 0.20 0.41 .06 �.02 .01 .00 �.21** �.05 .00 .1019. Switzerland 0.07 0.24 .13* .02 .00 .04 .08 .00 .04 .0020. Italy 0.05 0.22 �.16* .02 �.06 �.04 .05 .10 .00 �.0721. Transition phase 0.41 0.49 .13* �.06 .76** .22** �.14* �.04 �.05 .0922. Foreign parent resources 15.43 5.86 .27** .48** �.32** .06 �.17* .07 .02 �.0223. Foreign parent decision influence 154.95 182.91 .02 .44** �.14* .08 �.32** .07 .03 �.01

a n � 225.* p � .05

** p � .01


formance during the early phase of economic tran-sition than during its late phase.

Likewise, one could claim that our knowledgecategories varied in tacitness. For example, mana-gerial and marketing expertise may be more orga-nizationally embedded and not as readily codifiedas product development and production skills(Shenkar & Li, 1999). For a finer-grained analysis,we disaggregated our measure of knowledge acqui-sition and created separate knowledge acquisitionmodels using each of the six categories as depen-dent variables. With two notable exceptions, theresults were consistent with those obtained whenwe used the combined six-item construct. The ex-ceptions were management and marketing exper-tise, arguably the more tacit categories of knowl-edge. Increasing foreign parent involvement(resources and influence) directly enhanced thetransfer of management and marketing expertise.However, these effects did not vary between theearly and late transition phases. Our analyses sug-gest that differences between the early and latetransition phases in terms of absorptive capacityand local managerial capabilities for instilling alearning environment are significant consider-ations in the transfer of explicit knowledge, andperhaps are less so for tacit knowledge. These re-

sults highlight the difficulty of transferring tacitknowledge (Von Glinow & Teagarden, 1988). Thelevel of tacit knowledge transfer due to foreignparent involvement remains similar over time evenas absorptive capacity and local managerial capa-bilities improve within an economy. Perhaps astronger differentiation between the early and latetransition phases is needed to detect effects for tacitknowledge transfer comparable to those found herefor more explicit knowledge.

Finally, it could be argued from a resource-basedview that foreign parent resource provision anddecision influence mutually support joint venturemarket performance. Moreover, their mutual sup-port may be contingent on the current transitionphase of an economy. The coefficient for our test ofthis three-way interaction was not significant.However, detecting three-way interactions withsmall samples and a categorical interaction term isdifficult (Stone-Romero et al., 1994). Our data sim-ply may not have been suitable for detecting suchan effect.

DISCUSSION

In this study, we set out to better understand howthe role of foreign parents in the success of local

TABLE 4Continued

9 10 11 12 13 14 15 16 17 18 19 20 21 22

�.05�.10 �.13�.07 �.09 �.21**�.05 �.06 �.15* �.10�.17* �.13 .15* .37** �.21**�.05 .03 .00 .08 �.07 �.04

.11 .00 .09 �.12 �.08 .07 �.08�.08 �.03 .13 .00 .01 .14* �.17* �.21**�.04 .08 �.09 �.06 .00 �.10 �.12 �.16* �.34**�.05 .10 �.05 .07 .00 �.06 �.06 �.08 �.17** �.13

.06 �.06 �.08 .15* .02 .06 �.06 �.07 �.16* �.12 �.06

.03 .04 .03 �.22** �.12 .05 �.01 .15* �.07 �.04 �.03 �.04

.00 �.06 �.05 .17* .07 .11 �.07 �.10 .16* .00 .00 �.04 �.35**�.09 �.09 .01 .28** �.07 .24** .06 �.09 .09 .00 �.12 .04 �.13 .35**


joint ventures changes as an economic and institu-tional environment transitions from a plannedeconomy to a market economy. We found that thevalue of foreign parent involvement for currentmarket performance and knowledge acquisitiondiffered depending on transition phase. Foreignparent resources have a stronger influence on mar-ket performance in the early phase of an economictransition than in the late phase. Foreign parentresources may be more critical to market perfor-mance earlier, when alternative local factor mar-kets are less developed, foreign resources are rela-tively rare and inimitable, and market institutions

capable of facilitating arms-length relationships arelacking. By sourcing resources internally from aparent, a venture avoids the pitfalls of weak marketinstitutions. These results supplement the work ofKhanna and Palepu (2000), who found that thevalue provided by tightly knit Chilean businessgroups in the early development of their marketsystem shrank as the institutional context matured.

In contrast, foreign parent resources had a stron-ger influence on knowledge acquisition for jointventures in the late phase of the transition than inthe early phase. We conjecture that the capacity toabsorb new knowledge and the motivation for

TABLE 5Results of Hierarchical Regression Analysis

Variables

Market Performancea Knowledge Acquisitionb

Restricted Full Restricted Full

Constant 0.86 .43 15.09** 15.70***

ControlsKnowledge acquisition �0.03 �0.02Age �0.13 �0.11 0.28 0.22Size 0.00* 0.00** 0.00 0.00Hungarian equity �0.02* �0.02* �0.05** �0.06**Chemicals/pharmaceuticals 0.90 0.36 1.44 2.34Electronics 1.03 0.65 2.21 2.78Construction 1.00 0.97 �1.12 �0.56Financial services 1.39 0.85 �0.83 �0.28Computers/software 0.62 0.54 �0.52 0.14Machinery/components 0.21 0.25 1.36 1.23Textiles 0.20 �0.14 �0.43 �0.11Food processing �1.10 �1.40 �2.02 �1.31Export sales 0.00 0.00 0.00 0.01United Kingdom �0.45 �0.60 �1.05 �1.77United States �0.37 �0.35 �0.53 �0.47Germany �0.15 �0.22 0.73 0.47Austria 0.15 0.25 0.06 �0.24Switzerland 1.67 1.49 1.75 1.87Italy �1.82 �1.66 1.60 1.20

Direct effectsForeign parent resource provision 0.21*** 0.37*** 0.44*** 0.26*Foreign parent decision influence 0.00 0.00 0.01*** 0.01***Transition phasec 1.92* 1.72* �0.47 �0.13

Interaction effectsForeign parent resource provision � transition phase �0.30*** 0.38*Foreign parent decision influence � transition phase 0.00 �0.01**

R2 .23*** .28*** .36*** .40***�R2 .05*** .04**

a n � 225.b n � 241.c Early versus late.

* p � .05** p � .01

*** p � .001


learning is limited immediately after the onset ofmarket reforms. Only after a local economy has hadtime to develop a capacity and intent for learningwill local ventures be able to fully exploit the op-portunity to acquire knowledge from the resourcesprovided by their foreign parents. These resultssupport the theoretical insights of Newman (2000),who argued that an organization’s capacity forlearning and transformation depend on institu-tional context. She maintained that Central andEastern Europeans in particular lack the mentalmaps needed for interpreting concepts from theWest. Hungarian joint ventures were unable to ex-ploit the opportunity for learning from foreign re-sources in the early years of institutional upheaval

but were able to do so in the later phase of thetransition. In sum, the efficacy of foreign parentresources changes as an economy evolves, beingmore critical to market performance in the earlyphase and increasingly vital for learning in the latephase.

Foreign parent decision influence was shown tohave a stronger link to knowledge acquisition dur-ing the early phase of the transition process thanduring the late phase. Foreign management influ-ence may reflect a deeper appreciation for learningand knowledge transfer to a joint venture than localmanagement decision influence, particularly dur-ing the early phase of transition. Foreign parentsare more likely to provide the guidance that leads

FIGURE 1Interactions between Transition Phase and Resource Provision


to a learning environment. Only as local managersbecome increasingly adept in the ways of marketeconomics and gain an appreciation for knowledgeacquisition over time and through experience willthey begin to replace foreign managers as advocatesfor learning.

Implications for Theory

Overall, our results complement those of otherstudies that have examined the influence of insti-tutional and economic environment on firm bound-aries and scope (e.g., Mayer & Whittington, 2003;Wan & Hoskisson, 2003) and knowledge transfer(Kostova & Roth, 1999). For example, Steensma,Marino, Weaver, and Dickson (2000) demonstratedthat descriptive theories predicting alliance forma-tion are more or less viable depending on the na-tional cultural contexts of potential alliance part-ners. We extended such research by showing thatmanagement theories predicting joint venture out-comes are also contingent on the broader environ-mental context. Understanding the limitations ongeneralizability and the boundary conditions underwhich our theories hold or do not hold is a criticalstep in the development of sound theory (Dubin,1978).

As Porter (1991) argued, resources and theirvalue are only meaningful when placed in a largercontext. An inward focus is insufficient. Research-ers are still in the early stages of understanding theexternal contingencies that influence the value ofthe various resources that firms may have at theirdisposal—that is, the “what” and the “when” ofresource value. Miller and Shamsie (1996) found

that assorted types of resources influenced firmperformance differently as the stability of an indus-try environment changed. Our analysis further re-veals that the value of foreign parent involvementvaries with the quality of factor markets and insti-tutions. Clearly, when applying the resource-basedand learning perspectives often used to explainventure success, one needs to take broader eco-nomic and institutional context into account. Thisbroad focus becomes particularly important as re-sources cross borders. Resources that may providevalue in the forms of performance and capabilitydevelopment for a domestic joint venture may beless valuable in a foreign context, and vice versa.

If sustainable performance depends on both re-sources and knowledge-based capabilities, as manyhave suggested (cf. Amit & Schoemaker, 1993), theresource-based and organizational learning per-spectives are inseparable, and researchers need touse them together to obtain a more complete storyof long-term viability. This is particularly true inthe context of joint ventures, where resources andknowledge are being sourced from parent firms.Our results suggest that the resource-based and or-ganizational learning perspectives are indeed com-plementary. Our two outcome variables, marketperformance and knowledge acquisition, are em-pirically distinct and have unique relationshipswith foreign parent involvement and transitionphase. Future theoretical development that tightlyintegrates these two perspectives while addressinghow external environment might affect market per-formance and capability development uniquelywould be worthwhile.

For example, how might a competitive environ-

FIGURE 2Interactions between Transition Phase and Decision Influence


ment affect the value of parent resources for thecurrent market performance and capability devel-opment of joint ventures? Perhaps in munificentenvironments parent resources are not as criticalfor joint venture performance as they might be inmore intensely competitive environments. Mini-mizing transaction costs by sourcing from a parentmay not be as essential in munificent environments(Robins, 1987). However, a munificent competitiveenvironment may afford a joint venture the slackneeded to experiment and effectively developknowledge-based capabilities resulting from for-eign parent involvement (Hedberg, 1981). By ac-counting for these two different outcomes, we canbegin to appreciate the dynamics and conditionsunder which parents can provide value to theirjoint ventures in terms of not only current perfor-mance, but also capability development.

Implications for Practice

Our results provide insight for foreign multina-tionals as well as for government policy makers. Intoday’s global economy, many firms are lookingacross their borders to new markets. Foreign firms’entry into emerging markets can range from early tolate. Foreign parents may need to take the timing oftheir entry into account when considering the leveland type of their involvement. Strong resource pro-vision is vital for market performance in the earlyphase of a country’s economic transition. Early en-trants should plan to provide extensively for theirventures if they are to succeed.

Early entrants may also need to adjust their ex-pectations as to how fast their foreign ventures willinternalize capabilities from provided resourcesand become more autonomous. The capacity forlearning is limited early in a transition, when thereis significant upheaval (Newman, 2000). Our re-sults do suggest, however, that early entrants canenhance knowledge acquisition through their deci-sion influence and authority. Foreign parent man-agers are better equipped to establish a vision thatencourages learning than their local counterparts.Heavy-handed influence does not appear to be vitalfor market performance or knowledge acquisitionby joint ventures during the late phase of transition.Indeed, there is some evidence that heavy-handedinfluence by foreign parents can lead to conflictand the dissolution of a joint venture (Steensma &Lyles, 2000). Taken together, these results suggestthat early entrants into transitioning economiesshould consider taking dominant decision-makingroles in their joint ventures, whereas late entrantscan possibly relinquish some influence withoutsacrificing the success of the ventures. Late foreign

entrants can create value for their joint ventures byproviding resources. However, they do so not byenhancing market performance, but by providingopportunities for learning.

Our results also provide insights for policy mak-ers in transitioning economies. Government offi-cials typically view international joint ventures as avaluable mechanism for transferring knowledge.However, we found that a joint venture’s ability toacquire knowledge depends on both the role of theforeign parent and the transition phase. Foreignparent influence is often viewed as a threat to sov-ereignty, and government officials in transitioningeconomies may take steps to limit foreign parentinfluence over their local joint ventures. Our re-sults suggest that such restrictions may limitknowledge acquisition, particularly early in a tran-sition, when local managers lack the wherewithalto create a learning environment. Foreign parentinfluence is needed to facilitate learning.

Moreover, the sourcing of foreign resources iscommonly emphasized as a means of acquiringstate-of-the-art knowledge. However, without therequisite capacity and motivation for learning,which are often lacking early in a transition, realknowledge transfer may not occur. Instead, pa-tience may be needed to allow these capabilities toevolve over time. Indeed, our results suggest that a“big bang” approach to transition, in which reformsare implemented rapidly, may be too aggressiveand inconsistent with the gradual evolution of thesofter factor markets in terms of managerial andlearning capabilities. Local ventures may need tobe protected for some time from the “hidden hand”of market forces until knowledge-based capabilitiesare developed.

Limitations and Future Research

Our study is limited by our reliance on one coun-try. Hungary’s economic system prior to World WarII was based on market institutions. Other transi-tioning economies may lack this history with mar-ket traditions and experience additional difficul-ties. However, Hungary is one of the moreadvanced economies in terms of transition to amarket structure (Economist, 2002). Hungary pur-sued a more gradual process that focused on foreigninvestment and institutional change as opposed toa “big bang” transitional strategy. Others have beenrelatively late in recognizing the benefits of foreigninvestment (e.g., Romania and Bulgaria; Economist[2002]). Thus, Hungary’s experiences can provideimportant lessons for those countries that are stillearly in their transitions. While our one-country,two-period design provided certain advantages, a


multicountry study examining how the relation-ships between foreign parent involvement and jointventure success vary depending on national con-text would be particularly provocative.

Although focusing on two points in time enabledus to collect rich primary data not available fromarchival sources, the time-based dummy variable isan admittedly crude proxy for transition phase.Researchers may want to consider using a longitu-dinal panel design to tease out how specific changesin the institutional and economic environment influ-ence various aspects of joint venture behavior.

We also focused on only one organizational form,the joint venture. By doing so, we were able toconcentrate on constructs that are specific to jointventures. Joint ventures, however, are inherentlyunstable, owing to shared equity. Understandinghow foreign parent involvement, knowledge acqui-sition, and market performance influences howjoint ventures in transitioning economies evolve towholly owned subsidiaries and the control of thosesubsidiaries (foreign or local) would also provide acontribution.

Conclusion

Despite these limitations, this study provides ev-idence that the role that foreign parents play in thesuccess of their joint ventures depends in part onthe broader institutional and economic environ-ment of those ventures. We contribute to the re-source-based and learning perspectives on interna-tional joint ventures by showing how the value offoreign partner involvement changes as economictransition from centrally planned to free marketeconomy progresses. In today’s global environ-ment, where firms are pursuing emerging marketsin different stages of development, understandinghow economic and institutional context influencesthe role that firms might play in the success of theirpartnerships is not only interesting from an aca-demic perspective, but also has practitioner andpolicy implications.

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H. Kevin Steensma ([email protected]) is anassociate professor of management and organization atthe University of Washington Business School. He re-ceived his Ph.D. from Indiana University. His researchfocuses on technology strategy and international alli-ances.

Laszlo Tihanyi ([email protected]) is an assistant profes-sor of management at the Michael F. Price College ofBusiness, University of Oklahoma. He received his Ph.D.from Indiana University. His research interests includeinternational diversification, the effects of corporate gov-ernance on firm international strategies, and organiza-tional adaptation in transition economies.

Marjorie A. Lyles ([email protected]) is a professor ofinternational strategic management at Indiana Universi-ty’s Kelley School of Business and the American UnitedLife Chair. She addresses organizational learning, inter-national strategies, and alliances, particularly in emerg-ing economies.

Charles Dhanaraj ([email protected]) is an assistantprofessor of management and international business atthe Kelley School of Business, Indiana University. Hereceived his Ph.D. from Ivey Business School, the Uni-versity of Western Ontario, Canada. His research focuseson international alliances and networks, and multina-tional corporations.


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