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

The industry in which firms operate also plays an important role in firms' joint venture performance because of structural heterogeneity across industries. For example, firms in some industries enter into joint ventures for defensive reasons (e.g., industry shakeouts) whereas those in other industries may do so for offensive reasons (e.g., strategic market expansion). The different rationales for joint venture formation (i.e., preserving economic value versus creating it) require an explicit recognition of the context in which joint ventures occur. Hence, the industry in which a firm principally operates plays an important role. The structural heterogeneity of industries is especially relevant for IJVs (Garcia-Canal, 1996).

Coupled with differences in national agendas, industry heterogeneity also influences the type of partner (firms, state-owned enterprises) with which firms enter into joint ventures. The significance of partner-type lies in that profit-seeking firms usually have agendas (economic) that are at odds with those (social) of stateowned enterprises (Lummer & McConnell, 1990). These differences require dissimilar approaches to joint venture management and can jeopardize parents' shareholder value (Lummer & McConnell, 1990). Moreover, governments in some countries often require multinational firms to enter into ventures with domestic state-owned enterprises. This view can alter the dynamics of a joint venture relationship and thereby distort a joint venture's economic potential (Child & Marcokzy, 1993).

Firm-specific variables. Unlike the study of contextual factors, the study of firm- specific influences on joint venture economic outcomes has received considerable research attention. One commonly studied influence refers to the business scope of firms relative to that of their respective ventures and joint venture partners (Bleeke & Ernst, 1991). Greater overlap between firms' product-markets has the potential to generate scale and/or scope economies and lower the cost of organizing resources. Moreover, the overlap between partners' scopes has implications for opportunism (Park & Russo, 1996), which can negate potential gains from a synergistic combination of partners' resources (Harrigan, 1988).

Likewise, shareholder value creation via joint ventures varies with the nature of functional activity (Das, Sen, & Sengupta, 1998) and so implicitly with the ventures' task complexity (Killing, 1988); this complexity is defined in terms of the number of distinct types of value chain activities undertaken simultaneously (GarciaCanal, 1996). Differential value creation arises because joint pursuit of different types of value activities increases (decreases) the social complexity of resource deployments, and renders these deployments less (more) vulnerable to competitive imitation. Yet, the interconnectedness of joint pursuits also increases asset-specificity as well as the frequency of transactions (Brockhoff, 1992), and the need for interpartner coordination (Killing, 1988). These factors increase parents' vulnerability to opportunistic exploitation (Das et al., 1998) and raise their overall transaction costs (Brockhoff, 1992) with unfavourable implications for value creation.