The Multinational Enterprise and the Emergence of the Global Factory

Peter J. Buckley

• Publisher: Palgrave Macmillan
• Year: 2014
• Print ISBN:
  9781137402363
• eBook ISBN:
  9781137402387
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

The Multinational Enterprise and the Emergence of the Global Factory brings together research papers authored by Peter J. Buckley, focusing on three of the most important empirical and theoretical issues in the global economy: the rise of the 'global factory'; the growth of FDI from emerging economies; recent developments in the theory of IB.

Section III

Spatial and Institutional Analysis of MNEs

9

Combinations of Partners’ Joint Venture Formation Motives

Elko Klijn^a, Jeffrey J. Reuer^b, Peter J. Buckley^c, and Keith W. Glaister^d

^aManagement and Organization, Vrije Universiteit Amsterdam, Amsterdam, The Netherlands; ^bKrannert School of Management, Purdue University, West Lafayette, Indiana, USA; ^cCentre for International Business, University of Leeds, Leeds, UK; and ^dManagement School, University of Sheffield, Sheffield, UK

Purpose – Prior research on joint venture (JV) formation often examines a single focal firm and assumes it has a single motive for collaboration. This study seeks to investigate how formation motives of partner firms are symmetrically coupled. It considers motives in the context of different European Economic Interest Groupings (EEIGs) characteristics and partner firm characteristics.

Design/methodology/approach – Self-administered surveys were employed and a total sample of 104 partners cooperating in 47 different JVs (EEIGs) was used for data analysis.

Findings – The paper observes the coupling of different formation motives and finds that different rationales to establish international JVs are held simultaneously by partners. Furthermore, it finds that the number of partners increase when partners hold motives primarily to develop knowledge.

Research limitations/implications – Current theorising might focus too narrowly on particular motives or at best on combinations of motives within a specific theoretical approach. Such a single approach might be rather simplistic due to the multiple rationales to enact EEIGs by partners. Future studies that accommodate multiple perspectives simultaneously in a single paper would significantly advance the field and hold more explanatory power.

Practical implications – The paper finds that in general partner motives are symmetric, but some motives are more natural candidates for partners to couple together. Furthermore, smaller firms can also benefit by forming more complex collaborations and hold multiple motives simultaneously.

Originality/value – The paper reinvigorates theoretical development by showing the amalgamation of different motives and theories for JV establishment. It also provides new guidelines to practitioners and scholars alike by examining various combinations of collaborative motives and how they are coupled across partners in alliance dyads.

Introduction

There are numerous strategic motives that partners can have to form interorganizational relationships. Joint ventures (JVs) can act as a vehicle for learning; create economies of scale and scope; enable firms to address host government policies; facilitate entry into new product or geographical markets; help firms strengthen or consolidate existing market positions; or assist with risk management (Contractor and Lorange, 1988; Glaister and Buckley, 1996; Hitt et al., 1997; Koza and Lewin, 1998). While over the years there have been important theoretical advances made in the JV literature in studying these drivers of inter-firm collaboration, this has unfortunately come at the cost of imputing a single motive to investing firms, even though practitioners may hold multiple motives for engaging in JVs (Colombo, 2003; Reuer and Koza, 2000). As a result, there exists limited prior empirical research that has provided an overview of different formation motives that practitioners may have at the same time to form JVs, partly due to the challenges in obtaining such information (Kale and Sing, 2007). For example, Glaister and Buckley (1996) provided a detailed empirical examination of rationales for the establishment of JVs, yet their study did not accommodate the possibility that firms might simultaneously hold multiple motives when forming JVs.

The prior accounts of firms’ motives for forming JVs are therefore limited in the sense that they focus on a specific motive by a single focal firm. The drawback of adopting a focal-firm perspective is that it essentially provides a one-sided analysis of why JVs exist (Zajac and Olsen, 1993; Wang and Zajac, 2007). As a result, these studies provide practitioners with little advice on how their own rationales might be multifaceted, as might those of their partner(s). The findings of this paper enable managers to better understand their counter-parts’ rationales for JV formation and how they are coupled with their own. Furthermore, this paper provides practitioners with some exploratory evidence on how to structure a specific deal based on specific firm- and alliance level characteristics that are related to single or multiple motives. This paper therefore aims to provide:

• a preliminary analysis of which specific motives are held simultaneously by partners;

• an overview of the inter-relatedness of these motives in explaining JV enactment; and

• an overview of how these different motives are associated with alternative deal structures.

In order to address these questions, we have structured the paper as follows. First, a theoretical overview of the different categories of formation motives is provided for summary purposes. This is followed by a section briefly describing the methods used to examine the clustering of these motives. We then compare the different formation motives held by partners in the same JV deal to detect potential symmetries or asymmetries in firms’ strategic intents for their collaborations. We then analyze how firm-level and JV-level characteristics are associated with these formation motives. We conclude with an interpretation and discussion of the findings.

JV formation motives

Prior research has extensively studied what might motivate firms to engage in JVs (Dong and Glaister, 2006; Glaister and Buckley, 1996; Harrigan, 1985). For instance, Dong and Glaister (2006) observed partner selection criteria and formation motives of Chinese and Western firms. They find that partners operating in Sino-foreign JVs have different reasons to establish JVs in China; however, their analysis did not compare the different formation motives between partners at the dyad level, partly due to a lack of observations obtained from partners from the same JV. Bierly and Gallagher (2007) discuss the importance of strategic fit between partners; however they ignore the potential similarities that partner firm can have.

Prior literature has also discussed formation motives by adopting a choice perspective. In these cases firms can have different reasons to choose a JV over an acquisition (or divestiture). Hennart and Reddy (1997), for instance, argue that a difficulty in disentangling desired assets from non-desired assets might lead to choosing a JV over an acquisition. In situations where separation of desired assets is difficult to achieve, firms will incur high management costs. Because JV formation is a method to bypass some inefficient costs, firm might pursue JVs over acquisitions (Hennart, 1988).

The variety of different studies addressing JV formation motives can be grouped in a number of categories. We follow prior work by Glaister and Buckley (1996) and Hennart (1988) to identify four classes of formation motives. Table 9.1 summarizes these different categorizations.

Knowledge/technology development

The first category in Table 9.1 is knowledge/technology development. Organizations form JVs to learn and develop new capabilities. This motive is related to the exchange of knowledge and technologies which enable partners to become more efficient and effective in the development of these capabilities in-house (Kogut and Zander, 1993). The market value of firms competing in emerging, knowledge-intensive industries is predominantly, if not entirely, based on their option to grow in the future (Folta, 1998; Kogut, 1991). For this reason an organization’s ability to develop, search for, and exploit capabilities that they currently do not have is important. An example is NUMMI, a JV established by GM and Toyota. One of the reasons for establishing this partnership by both sides was to learn from each other: i.e. GM learned “the Toyota way” of production and quality control and Toyota acquired GM’s skills in product design and marketing in the American market (Liker, 2004).

Table 9.1 An overview of categories of joint venture formation motives

Category	Related alliance motives
Knowledge and technology development	Supplementary technological knowledge Exchange of complementary technology/knowledge Exchange of existing technology/knowledge Developing a new technology/knowledge Enabling product diversification
Cost and risk reduction	Sharing of research and development costs Sharing of investment costs Economies of scale: joint operations lower unit costs Spreading the risk of a large project over more than one firm
Low-cost sourcing	Transfer of business units to lowest cost location Exchange of patents or territories to other partner(s) To concentrate on higher business margin
Market power	Improvement of servicing international customers Facilitates international expansion Compete more effectively against a common competitor To maintain position in existing market

Sources: Dong and Glaister (2006); Glaister and Buckley (1996).

Risk and cost reduction

A second category of motives is risk and cost reduction. JVs are regarded as an attractive mechanism for hedging risks because neither partner bears the full risk and cost of a particular activity (Johnson and Houston, 2000; Porter and Fuller, 1986). One partner might manage the operation, while the other merely contributes capital and absorbs some of the risk of failure (Mariti and Smiley, 1983). Contractor and Lorange (1988) argue that a JV can reduce a partner’s costs and risks, because it enables the spreading of the risk of a large and costly project over more than one firm. Furthermore, a JV can lower the total investment cost of a particular project or the assets at risk by combining expertise and slack facilities in the parent firms. An example of a JV that was established by the partners to reduce costs and risks is the mobile phone software developer Symbian. This organization is owned by hardware manufacturers Ericsson (15.6 percent), Nokia (47.9 percent), Panasonic (10.5 percent), Samsung (4.5 percent), Siemens (8.4 percent) and Sony Ericsson (13.1 percent). The aim of the JV is to produce intelligent software for mobile phones, enabling users to access telephony, e-mail, web, electric diary and entertainment in one device. The high initial investment costs and associated risks with the technological development resulted in the formation of this JV. Partners were not prepared to undertake the entire development process by themselves due to these high costs and risks (Buckley et al., 2009).

Low-cost sourcing

A third category of JV formation motives noted in prior literature is low-cost sourcing. JV formation enables organizations in similar industries to rationalize production by outsourcing activities to each other. Costs might be reduced through economies of scale and learning by doing, while avoiding the uncertainties and difficulties of full-scale merger or greenfield operations (Johnson and Houston, 2000). Partners might also form a JV to source activities to lower cost locations. By doing so, the enactment of the JV results in

overall cost reductions by using the comparative advantage of the other partner. Where, for example, components are made by both partners in different locations and with unequal costs, production can be transferred to the lower cost location (Buckley and Casson, 1988). An example is the JV between Damen ShipYards Group NV and state-owned Vietnam Shipbuilding Industry Corp. These organizations planned to form a JV named Damen Vinashin Shipyard (DV) to manufacture various kinds of ships like tugboats, high-speed ships and vessels. Damen ShipYards previously produced ships in The Netherlands but is able to produce at a lower cost in Vietnam by enacting this JV.

Market power

The final category for JV formation motives is market power (Glaister et al., 2003; Dong and Glaister, 2006). JVs can influence how a firm competes wi...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Figures and Tables
• Foreword by Timothy Devinney
• Acknowledgements
• List of Contributors
• Introduction and Overview
• Section I Internalisation Theory and the Global Factory
• Section II FDI from Emerging Countries
• Section III Spatial and Institutional Analysis of MNEs
• Section IV Policy Analysis
• Index