Revisiting Shareholder Value Creation via International Joint Ventures: Examining Interactions Among Firm- and Context-Specific Variables

Canadian Journal of Administrative Sciences, Jun 2004 by Merchant, Hemant

Abstract

This study attempts to empirically reconcile the prevalent mixed findings regarding reactions of capital markets to announcements of American firms' participation in international joint ventures (IJVs). It does so by first admitting salient contextual variables into the portfolio of firm-specific variables-heretofore mostly considered in isolation-and then modeling their collective impact on these parents' shareholder value. A cluster analysis of more than 700 equity IJVs yields findings that highlight important interactions between the two sets of variables, which better inform creation and destruction of shareholder value for IJV parents. These findings facilitate development of a conceptual framework for assessing how parents can exploit the inter-connectedness between their firm-specific and contextual domains. Thus, this study lays a foundation for generating more refined predictions about shareholder value creation via IJVs.

Résumé

La présente étude essaie de concilier, de façon empirique, les conclusions contradictoires, révélées par l'étude des réactions des marchés de capitaux aux annonces par les firmes américaines de leur participation aux coentreprises internationales. Elle y parvient en deux temps : premièrement, par la reconnaissance des variables contextuelles fondamentales, jusque-là surtout considérées de façon isolée, dans le portfolio des variables spécifiques aux firmes; deuxièmement, par la modélisation de leur impact collectif sur la création des valeurs pour les actionnaires des firmes impliquées dans ces coentreprises. Les conclusions tirées de l'analyse par segments de plus de 700 coentreprises boursières internationales mettent en évidence d'importantes interactions (entre les deux groupes de variables) dans la création et la destruction des valeurs pour les actionnaires des coentreprises internationales. De façon incidente, les conclusions de l'étude tracent les contours d'un cadre conceptuel permettant de montrer comment les partenaires peuvent exploiter l'interrelation entre leurs secteurs spécifiques et les domaines contextuels. En somme, l'étude jette les bases d'une meilleure capacité de prédiction dans la création des valeurs par les actionnaires, via les coentreprises internationales.

In a survey of empirical work investigating capital markets' reactions to announcements of firms' international joint venture (IJV) participation, Merchant (2000a) observed almost complete disagreement about influences on shareholder value creation in American parents. The mixed findings pertained not only to the statistical impact of specific variables on parents' shareholder value, but also to the direction of significant relationships. Moreover, the study corroborated Gulati's (1998, p. 294) observation that the inconsistencies arose from researcher inattention to the external context in which IJVs were formed. This context includes industryand country-level factors.

The inattention is regrettable because, by ignoring the role of context-specific conditions, researchers themselves may have induced mixed results and hindered theory development (Robson, Leoidou, & Katsikeas, 2002). Thus, a study that models the collective impact of salient firm- and context-specific variables can increase our understanding of how IJVs create (or destroy) shareholder value for their parent firms. Studies that model interactions among these variables are also needed "to prevent well-intended academic endeavours from further degenerating into a mass of disconnected empirical studies on the topic" (Merchant, 2000a, p. 1853). It is expected that such studies will reconcile the noted inconsistencies as well as highlight the role of contextual factors in augmenting parents' shareholder value though IJV participation.

Given the above motivations, this study asks: How does inclusion of contextual variables along with firmspecific variables help reconcile previously reported inconsistencies regarding shareholder value creation via IJVs? As mentioned previously, contextual variables refer to industry- and country-level conditions over which firms have less direct control, at least in the short term. In contrast, firm-specific variables refer to organizational conditions that firms can influence relatively more directly. Contextual factors reflect attributes of firms' external environment whereas firm-specific factors reflect those of the firm itself.

This study addresses its research question via theoretical as well as methodological upgrades. On the theoretical front, this study invokes arguments from the foreign direct investment literature; it relies on this literature to select and justify the engaged contextual variables. Despite its relevance, this literature has been rarely considered in previous IJV value creation studies. On the empirical front, this study models multiple interactions among salient firm-specific and contextual variables, and emphasizes their collective impact on shareholder value creation. It engages cluster analysis methodology to uncover patterns and associations in its sample. Unlike previous work, this study does not examine the impact of singular variables on shareholder value creation via IJVs.