The effect of foreign partner network embeddedness on international joint venture failure: Evidence from European firms’ investments in emerging economies

Access to trusted information about potential local partners is a critical factor for international joint venture (IJV) stability and success in emerging economies. We build on social network theory and examine how foreign investors can benefit from their alliance networks in accessing reliable information on the availability, resources, and behavior of potential local IJV partners. More specifically, we examine positional embeddedness in networks and network density and how these factors help foreign firms mitigate behavioral uncertainty in IJVs and thus reduce the likelihood of failure. We use data on 349 IJVs formed by 132 European firms in emerging economies during the 1995–1997 period and event history analysis to test our hypotheses. Our findings indicate that having an alliance network is a necessary but insufficient condition to mitigate behavioral uncertainty of local partners. We find that only densely tied networks offer benefits of reliable information on potential local partners that ensure the longevity of IJVs and that a central position in an alliance network translates into lower IJV failure.     

Earnings announcement timing,uncertainty, and volatility risk premiums

We examine the relationship between firms’ quarterly earnings report timing and uncertainty before quarterly earnings announcements. Prior research provides conflicting predictions on how investor uncertainty and report timing are related. Using implied volatilities from equity options and the realized returns to straddle positions, we find evidence that uncertainty and volatility risk premiums are higher for firms that report later in the quarter. Further tests show that the increase in option premiums is unexplained by risk factors suggesting a mispricing by investors. These results are not associated with static firm-level factors and our findings are concentrated in high growth firms.     

Determining investment size and local embeddedness under host market uncertainty and growth rates

This study employs a growth options perspective to examine how multinational corporations (MNCs) design their investment attributes under the influence of host market uncertainty and growth rates. It specifically examines MNCs’ decisions on investment size and local embeddedness under host market conditions. Using data on Korean overseas manufacturing subsidiaries, we find that MNCs choose either more-local-embedded small investments or less-locally-embedded large investments under high demand uncertainty and GDP growth rates. We also find that this choice is moderated by host market political risk and competition. Our findings imply that MNCs consider both uncertainty-driven flexibility and growth rate-induced commitment when selecting international investment modes. This consideration allows MNCs to gain flexibility as well as an enhanced ability to expand in the future. This study contributes to the literature on real options and entry modes in the international business area by showing how host market conditions and investment decisions are related.     

Valuation of brand equity and retailer growth strategies using real options

In marketing, significant attention has been devoted to the study of drivers and outcomes of strategic flexibility drawing on real options theory. However, research that quantifies the specific value of flexibility reflected in a bundle of strategic real options is lacking. To remedy this gap, we develop a real options-based framework that takes account of brand expansion and extension options to value brand equity and retailer growth strategies. We show how to value the bundle of strategic real options associated with a flexible marketing strategic vision and how to assess the growth strategies related to the corporate brand of an international retailer. We apply our method to estimating the brand equity of Starbucks both under growth and adversity conditions. The results reveal that our method can more reliably incorporate the growth potential of the brand under uncertainty conditions. Comparisons with other brand valuation approaches are discussed. Our study helps clarify the links among management’s strategic plans, brand-based marketing strategies and share price, and allows to better monitor the impact of retailer strategic choices on long-term brand equity value.     

Performance of international joint ventures in Turkey: perspectives of Western firms and Turkish firms

This study compares responses from Western partner firms and local partner firms from a sample of international joint ventures (IJVs) in Turkey, in order to analyse the performance of IJVs on a range of topics including overall performance, the relative importance of performance criteria, and actual performance in terms of various dimensions of expected performance. The results of the hypotheses tests indicate that while both groups of partner firms are equally satisfied in terms of overall IJV performance, Turkish partner firms are more satisfied than Western partner firms regarding comparison with home country operations and host country competitors. The study also finds that the relative importance of IJV performance criteria varies to a moderate extent between Western and Turkish partner firms, and that both groups of partner firms evaluate IJV performance equally favourably across most underlying dimensions of IJV performance.     

Performance of international joint ventures in Turkey: perspectives of Western firms and Turkish firms

This study compares responses from Western partner firms and local partner firms from a sample of international joint ventures (IJVs) in Turkey, in order to analyse the performance of IJVs on a range of topics including overall performance, the relative importance of performance criteria, and actual performance in terms of various dimensions of expected performance. The results of the hypotheses tests indicate that while both groups of partner firms are equally satisfied in terms of overall IJV performance, Turkish partner firms are more satisfied than Western partner firms regarding comparison with home country operations and host country competitors. The study also finds that the relative importance of IJV performance criteria varies to a moderate extent between Western and Turkish partner firms, and that both groups of partner firms evaluate IJV performance equally favourably across most underlying dimensions of IJV performance.     

The moderating role of local embeddedness on the performance of foreign and domestic firms in emerging markets

This paper examines the impact of the firm’s degree of local embeddedness on its performance in emerging markets using the World Bank’s Enterprise Survey Manufacturing Sector Module data on 15,715 firms covering 78 emerging markets. We use the degree of localization of sourcing and sales to measure the degree of embeddedness in the host country market. We argue that since embeddedness brings the firm into closer interaction with local firms and institutions, the costs of embeddedness should be lower for local firms than for MNE subsidiaries, since local firms can be assumed to be better able to decipher local institutions. We find that both dimensions are subject to a reversed U-shaped function. That is, by extending the degree of local sales and local sourcing up to a certain percentage, a firm can realize positive performance growth by becoming more embedded into the emerging market, but beyond this point, the performance impact is negative. We also find that foreign firms involved in local sales seem to lose part of their ability to exploit their ownership advantages as compared to foreign firms that export their production.     

Are we on the same page?: Justice agreement in international joint ventures

This study examines the organizational and personal level conditions under which boundary spanners in an international joint venture (IJV) tend to disagree with each other regarding procedural justice. Nested within the logic of boundary spanning and building on the integrated justice theory and joint venture theory, this study develops an overarching framework explaining organizational- and individual-level factors impacting the level of disagreement. Our analysis of 182 IJVs in a large emerging market suggests that such disagreement increases with objective gap, ownership asymmetry, and environmental uncertainty but decreases with mutual familiarity between cross-cultural partner firms. Disagreement is also reduced when boundary spanners have more experience in managing IJVs and a longer period working together.     

Pricing Experience Goods in Information Good Markets: The Case of eBusiness Service Providers

We study the pricing strategies of firms providing a service in experience good markets with switching costs. Using data on vendors providing “hosting and related services” at an early stage of the market, we test for pricing distortions that follow from oligopolistic competition with quality uncertainty and switching costs. We find that firms with a brand name charge a premium for their product – leveraging the reputation accumulated in closely related markets. As the theoretical literature suggests, we also find that the type of pricing distortions along the product line depends on consumers’ expectations about quality. If consumers underestimate the quality of the product, firms behave as if they discount introductory contracts in order to build trust, and later on markup upgraded contract. In contrast, firms that offer a quality level that is lower than consumers’ expectations markup initial contracts while discounting upgraded ones.     

Determinants of ownership preference of international joint ventures: new evidence from Chinese manufacturing industries

Given the large size and rapid growth of foreign direct investment in China, the subject of ownership preference is of great interest to academics as well as to firms intending to invest in China. This study focuses on two sets of variables: industry-specific factors and venture-specific factors. Statistical tests based on information of 818 international joint ventures (IJVs) in China show that duration and scale of IJVs are positively associated with the level of foreign ownership. Industry-specific factors such as skill intensity, market concentration, market potentials, and foreign business agglomerations also positively influence the ownership preference of foreign firms, while local industry R and D intensity and productivity are found to be significant but negatively associated with the ownership preference.     

Public policy influences on the formation of international joint ventures

The literature on international joint ventures (IJVs) devotes little attention to the influence of public policy on the formation of such alliances. This paper examines the influence on the recent growth in IJVs of U.S. and foreign governments’ antitrust, trade, and technology policies. Little evidence supports the claim that U.S. antitrust policy is a critical influence on the decisions of U.S. firms to collaborate with foreign enterprises. IJVs are rarely substitutes for the collaboration among U.S. firms that might develop in the absence of antitrust restrictions. The recent interest by governments in “strategic technology policy” and the growing importance of “managed trade” in some high-technology industries both have created new incentives for the formation of IJVs. There are some important parallels between recent international joint ventures and the international cartel agreements of the interwar period, but modern IJVs do not yet appear to have reproduced the cartelization associated with the international patent-sharing agreements of the interwar period. Nevertheless, the influence of these market-distorting government interventions on the incentives to form IJVs means that the effects of these alliances on economic welfare may be mixed and should be monitored carefully.     

Advertising Budgeting Methods and Processes in China

By absorbing advanced knowledge and business practices from their overseas partners, international joint ventures (IJVs) have helped the development of many aspects of Chinese business. Do IJVs in China use more sophisticated advertising budgeting methods than their local counterparts? To test this, a construct was devised to measure budgetary sophistication, taking into account the tendency of firms to use multiple methods. Then, personal interviews were conducted with over 200 advertisers in China, representing a mix of Chinese state-owned enterprises (CSOEs), IJVs, and private companies. Their budgeting sophistication scores were then related to demographic, attitudinal, and behavioral variables. Results showed that the most common budgeting method used was "judgmental" and the most common decision-making process was "bottom-up, top-down." On average, firms used more than two budgeting methods. IJVs and firms that adjust their budgeting methods for different profitability levels used more sophisticated budgeting methods. Theoretical implications are discussed, and recommendations are made for firms that are working in or considering entering the Chinese market.     

Are Stock Options Grants to CEOs of Stagnant Firms Fair and Justified?

Prior research has examined several ethical questions related to executive compensation. The issues that have received most attention are whether executives’ pay is fair and justified by performance. Since more recent studies show that stock options grants constitute the single largest component in executive compensation, we examine the relations of these grants to economic determinants and corporate governance for firms in the stagnant stage of their lifecycle. We find that, on average, stock options grants comprise a significant portion of annual CEO compensation (26.4%) for stagnant firms. We also find that economic (corporate governance) factors explain less (or more) of the cross-sectional variation in stock options grants for stagnant firms than for growth firms. Furthermore, we document lower pay-performance sensitivity (i.e., weaker incentive alignment) and no improvement in future firm performance from past stock options grants to CEOs of stagnant firms. In particular, our study provides empirical evidence on some inefficiencies associated with stock options grants to CEOs of low potential (stagnant) firms, a long-standing concern of business ethics researchers (Moriarty, 2005; Nichols and Subramaniam, 2001; Perel, 2003). Our results also provide support for the corporate governance reforms discussed in Matsumura and Shin (2005), especially those proposed provisions that curtail the power of CEOs in the governance of firms.     

How Does Inward FDI Hinder or Promote Outward FDI? Three Cases of Chinese Automotive Industry

In this paper we investigate the mechanisms underlying dynamic linkages between inward FDI and outward internationalization in the Chinese automotive industry. While several studies have examined the relationship between inward and outward FDI using empirical data, this is among the first to employ a case study approach to investigate how international joint ventures (IJVs) established between foreign and Chinese automakers can shape their internationalization motivation, degree, and speed. We discuss some unique features of Chinese carmakers with and without IJVs to elucidate how firms without IJVs will be more driven to expand internationally while firms with IJVs face constraints in venturing abroad.     

Dual-edged tools of trade: How international joint ventures help and hinder capability building of Chinese firms

Forming international joint ventures (IJVs) with multinational corporations (MNCs) from advanced economies has been widely adopted by firms in emerging economies as an organizational approach to building up their innovative capabilities. In this paper, we emphasize that such an approach has both advantages (knowledge transfer from MNCs) and disadvantages (overdependence upon MNCs and reduction of innovation incentives) in the capability building of indigenous firms. Utilizing a longitudinal dataset consisting of 474 industries in China during 1998–2002, we find supporting evidence for the co-existence of the positive and negative impacts of IJVs. Specifically, we find that IJV presence has an inverted U-shape impact on innovative capabilities of indigenous firms; such an impact is stronger in industries with low (versus high) technology gap. We discuss the implications of our findings for research, managerial practice, and government policy.     

Does FDI Spur Productivity,Knowledge Sourcing and Innovation by Incumbent Firms? Evidence from Manufacturing Industry in Estonia

Does FDI affect knowledge sourcing activities, innovation and productivity growth of domestic firms? This study employs firm‐level panel data from Estonia’s manufacturing sector to investigate different channels through which FDI affects domestic firms. Based on instrumental variables approach, I find no evidence of an effect of FDI entry on local incumbents’ short‐term productivity growth. However, there is positive association between the entry of FDI and the more direct measures of spillovers. FDI inflow to a sector is associated with more knowledge flows to domestic firms and increase in their innovation activities.     

Beyond the Formal–Informal Dichotomy of Small Firm Strategy‐Making in Stable and Dynamic Environments

Strategy‐making assists small firms in managing change and uncertainty by developing suitable strategic options. We move beyond the conventional formal–informal dichotomy to show how three informal approaches—internal participation, external participation, and centralized strategy‐making—help both entrepreneurial firms and conservative firms to navigate more or less dynamic environments. In an empirical study of 320 small firms, we find that participation during strategy‐making relates positively to performance whereas centralization only matters for conservative firms in stable environments. In dynamic environments, better performance in entrepreneurial firms is associated with all three approaches. Our findings highlight the importance of viewing strategy‐making in small firms as multifaceted and context specific.     

Exploring the innovation strategies of young firms: Corporate venture capital and venture capital impact on alliance innovation strategy

We investigate how governance structure and power influence alliance exploration strategy. Adopting a real options perspective and the agency view, we suggest that innovation strategies differ based on the firm's governance authority. We find that the motivations of corporate venture capitalist firms, venture capitalists, and firm founders may have an impact on the formation of exploratory alliances among adolescent firms. Using a sample of 122 adolescent firms, we examine the influence that governance structure has on the firm's alliance portfolio and innovation potential. While the influence of corporate venture capitalist firms alone do affect alliance formation strategy, corporate venture-backed firms with founders having high influence (knowledge or ownership in the firm) are more likely to form innovation-focused alliances. In contrast, venture capitalist-backed firms tend to avoid innovation-focused alliances, preferring more exploitive ones, even when founders have high influence within the firm.     

Control,innovation and international joint venture performance: The moderating role of internal and external environments

This study aims to analyze how parent control strategies affect the degree of innovation in international joint ventures (IJVs) and how different types of innovation strategies - divided into radical and incremental innovation strategies - influence the performance of IJVs. This study uses the most widely adopted definition and operationalization of control in IJVs by Geringer and Hebert (1989), including the three dimensions: mechanisms, focus, and extent of control. These relationships are further analyzed by integrating internal and external moderating factors and their connections with IJV performance. Our theoretical analysis proposes that various control strategies differently influence an IJV’s innovation activities under various internal environmental moderating factors. These, in turn, differently influence the IJV performance. Furthermore, we suggest that the external environmental factors moderate the relationship between innovation strategies and performance of IJVs.     

The Perceived Advantages,Disadvantages and Strategic Responses of International Stockbroking Firms in ASEAN Countries

This paper presents the findings of a questiorznaire survey ofstockbroking firnu in five countries in the Association of SouthEast Asian Nations (ASEAN): Singapore, Malaysia, Thailand,Philippines and Indonesia. The main focus of the study istwofold: first, to investigate the advantages and disadvantages ofthe presence of international stockbroking firms in ASEAN, asperceived by local stockbroking firms; and second, to survey thestrategies of these firms in response to the competition posed byinternational broking firms. We find that local firms believe thatthere are benefits arising front the entry of foreign firms in theregion. Among the more important benefits cited are higherquality research, increase in trading volume and marketliquidity. The most intportarnt strategies of local firms are toimprove their research capability and to provide better stafftraining. This augurs well for the stockbroking industry in theASEAN region.