CONTENTS

FIGURES   II

TABLES   III

ABBREVIATIONS   IV

1  INTRODUCTION.  1

2  THE JOINT VENTURE.  3

2.1  WHAT IS A JOINT VENTURE?  3

2.2  DIFFERENT FORMS OF JOINT VENTURES  4

2.3  GOALS AND MOTIVES OF THE FORMATION  4

2.4  NEGATIVE EFFECTS FOR THE JOINT VENTURE PARENTS.  6

3  HOW TO MEASURE JOINT VENTURE SURVIVAL  7

3.1  DIFFERENT METHODS IN THE LITERATURE  7

3.2  PROBLEM OF CLASSIFICATION  8

4  VARIABLES INFLUENCING THE SURVIVAL RATE OF JOINT VENTURES  9

4.1  INTERNAL FACTORS  9

4.1.1  Differences in equity ownership  9

4.1.2  Cultural distance  13

4.1.2.1  National culture differences  13

4.1.2.2  Corporate culture differences  16

4.1.3  Direct competition between the parents.  17

4.1.4  Differences in size  18

4.1.5  Complementarity of partners’ resource contribution  19

4.1.6  Economic linkages  20

4.1.7  Trust  21

4.1.8  Partners’ joint venture experience.  22

4.1.9  Organizational learning  23

4.1.10  Diversification strategy.  24

4.2  EXTERNAL FACTORS  25

4.2.1  Risk and uncertainty in the host country  25

4.2.2  Currency fluctuation  27

4.2.3  Number of partners  28

5  SURVIVAL RATE FIGURES IN THE LITERATURE.  30

6  NEGATIVE EFFECTS OF A DISSOLUTION  32

7  CONCLUSION.  33

APPENDIX  A  

REFERENCES  C  

I

Figures   

Figure  1: Equity control and IJV performance.  

Figure  2: Effect of equity on mortality risk.  

Figure  3: Annual termination rate  

II

Tables

Table 1: Annual variation in the termination rate of IJVs....................................................... 30 Table 2: Summary of empirical studies on IJV stability ............................................................A

III

Abbreviations

LDC Less Developed Country

IJV International Joint Venture

JV Joint Venture

WOS Wholly Owned Subsidiary

IV

1 Introduction

Nowadays the world seems to be moving closer together and markets are becoming increasingly global. Firms take part in this globalization process and become international. A joint venture, particularly a cross-border joint venture, presents companies a promising opportunity to expand into new markets. Joint ventures can help firms to broaden their geographical market participation, to acquire new knowledge, to create economies of scale and scope and, most importantly, reduce risks.

The number of newly formed joint ventures is growing worldwide at an increasing pace. Yan (1998) discovered that the rate of alliance formation in the U.S. has been growing at an annual rate of more than 25 percent since 1985. A lot of the joint ventures endure for a long time but many do not. Kogut (1989) discovered a termination rate of international joint ventures of about 70%. There must be several reasons why they are vulnerable to instability and why so many fail.

The aim of this thesis is to discuss which determinants have an impact on the survival of joint ventures. Guidelines are presented regarding aspects that need to be considered if a company wants to form strategic alliances with other firms. There are internal and external factors that influence the survival of joint ventures. Experts believe that some factors are controversial as they can influence the stability in a positive as well as in a negative way. No clear consensus is found yet. Therefore I describe their positive as well as their negative impacts on the longevity of a jointly owned entity.

In Chapter 2 of this thesis I introduce the broad subject ‘joint venture’ by explaining general information. I first define the term (see Chapter 2.1) and identify different forms of joint ventures (see Chapter 2.2). Then I go on and point out why companies are interested in participating in a venture and why they benefit from it (see Chapter 2.3) but also, why it can be unfavourable (see Chapter 2.4).

The following section (Chapter 3) deals with the measures of survival used in the literature.

Subsequently, I describe internal (see Chapter 4.1) and external (see Chapter 4.2) determinants which influence the survival rate of joint ventures. In this section I discuss the influence of differences in ownership structures (see Chapter 4.1.1), of cultural distances be-

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tween partners (see Chapter 4.1.2), of direct competition (see Chapter 4.1.3) as well as of several other aspects.

In Chapter 5 I illustrate results of the preceding chapter by showing figures of termination rates and instability of different studies. As they all revealed different data on termination or survival rates, I summarize the average figures and note some of them in greater detail. This is followed in Chapter 6 by a discussion of negative outcomes that can occur due to a joint venture termination.

I end my thesis with a conclusion (see Chapter 7), summing up the most important findings and present implications including which factors should be further researched and predicting what the likely future of joint ventures will be.

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2 The joint venture

Initially, I discuss some general information about joint ventures and the motives for their creation as well as some explanations why firms sometimes refuse to become involved in this most intensive form of cooperation.

2.1 What is a joint venture?

When companies want to expand into a new business area or a new market they have different options to do this for example, an acquisition, supply contracts or licensing. However, interestingly companies predominantly prefer the joint venture. Joint ventures have become a popular and effective strategy for companies for internationalisation. There has been a rapid increase of international joint ventures in recent years. Yan (1998) found that the number of international cooperative arrangements formed in the 1980s exceeded the total number of international alliances created in all prior years combined. “A joint venture occurs when two or more firms pool a portion of their resources within a common legal organization” (Kogut, 1988, p. 319) to pursue certain strategic objectives. These firms create a legally and economically new organizational entity distinct from their parent ones (cf. Beamish & Inkpen, 1995). This entity can be horizontally- or verticallyrelated to either (or both) joint venture parents but can also be an unrelated entity (cf. Harrigan, 1988). In other words, a joint venture is a means of performing activities in combination with one or more firms instead of autonomously.

In addition to domestic forms of joint venture, international joint ventures are very common. “International joint ventures are ventures in which the sponsoring partners cooperate across national as well as cultural boundaries” (Yan, 1998, p. 775). They are often formed between one or more firms from a developed country and a partner from a developing country and located in this emerging country. The foreign partner, from the developed country, provides the joint venture with upstream resources such as funding, brand and production technology. In return the local partner provides downstream resources such as familiarity with the local market, access to distribution channels, personnel, knowledge of local regulations and preferential access to the State authorities (cf. Meschi, 2005).

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The joint ventures can be categorized into groups according to the purpose they should serve. These different forms will be explained in the following section.

2.2 Different forms of joint ventures

Most of the classifications usually distinguish two major types of joint venture. These types are different in the specific motive for which they are established. One type is an additive (Garrette & Dussauge, 1995) or scale joint venture (Hennart, 1988) whose aim is to achieve economies of scale and scope; the other type is a complementary (Garrette & Dussauge, 1995) or link (Hennart, 1988) joint venture that involves partners who want to combine distinctive but complementary competencies within a joint project. Another type is the Trojan Horse type, in which the partners engage in a learning race in order to acquire the other ones’ competencies as quickly as possible (Hamel et al., 1989).

A further way to discern joint venture is by the ownership structure which reflects different partner nationalities and partner affiliation. The former involves the country of origin of the parent firms and the later is defined in terms of whether the joint venture equity is related between the partners. With this classification we can distinguish four ownership structures: intra-firm joint ventures, which are those joint ventures formed between affiliated homecountry based firms; cross-national domestic joint ventures, which are established by unaffiliated home-country based firms; traditional international joint ventures, which are developed between home-country based and host-country based (local) firms; and finally tri-national international joint ventures, which are formed between home-country and third-country based firms (cf. Makino & Beamish, 1998).

This thesis is primarily concerned with the traditional joint venture as this is the form empirical research predominantly focuses on.

2.3 Goals and motives of the formation

In this section I outline the main reasons why companies form joint ventures. The rationales give an explanation as to why this kind of cooperation is such a popular form of strategic alliance.

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