Commitment in the IJV Company and Commitment Between the IJV Parent Companies

Commitment can be described as the willingness of joint ventures partners to exert effort in respect of their relationship with the joint venture (Mohr and Spekman, 1994). Committed partners will consider long-term gains rather than short-term advantages. In such cases the frequency and intensity of conflicts can be expected to be relatively low; therefore, higher

levels of commitment should positively affect IJV performance and partners’ satisfaction with IJV activities. According to Mohr and Spekman (1994), a high level of commitment provides a context in which both parties can achieve individual and joint goals without raising the spectre of opportunistic behaviour.

Lyons (1991) and Demirbag and Mirza, (2000) refer to parent companies’ commitment to IJVs as an important element of success. Buckley and Casson (1988) argue that commitment can be higher if a distribution of rewards from the venture, when successfully completed, is deemed equitable by all parties. Parent companies’ long-term commitment is also seen as a key factor by many researchers for the continuation of the IJV (Brown et al., 1990; Buckley and Casson, 1988; Beamish, 1988; Hyder and Ghauri, 1993). According to Turpin (1993), IJVs are very successful when partners avoid complexities, trust each other, and commit themselves wholeheartedly to the success of the new company.

Harrigan (1986) argues that the key to successful joint ventures will be a meeting of minds. Effective joint ventures depend upon trust, but they are often forged as a compromise between two or more parent firms who would rather own the child wholly. It is necessary to assess the parents’ commitment to their venture’s success and their willingness to contribute resources (or provide a market for outputs) in a manner that accommodates the IJV’s needs. Moreover, the study by Demirbag and Mirza (2000) shows that there is a strong correlation between commitment and IJV performance.

3.9 Summary and Concluding Remarks

This chapter has reviewed four major theories, with the emphasis on conceptual and empirical evidence, for explaining IJV formation. These views include the transaction cost theory, the organisational knowledge and learning theory, the resource-based view, and the strategic behaviour theory. The strategic behaviour theory is the principal approach informing the present study, although the other theories have valuable insights to contribute to particular aspects of the topic.

The transaction cost theory emphasises how firms transact in whichever manner minimise the sum of production and transaction costs via the IJV mode of governance, while organisational knowledge and learning theory stresses on the learning process in IJV operations and believes that a need for knowledge acquisition leads to IJV formation. Under the resource-based view, firms can gain competitive advantage and enhance performance if they gain access to their partners’ unique resources by forming an IJV.

The strategic behaviour theory points out more generally that firms transact in a manner which maximises profits through improving a firm’s competitive position in relation to their competitors by forming IJVs. Since the aim of this study is to examine IJV formation in the context of the Southeast Asian countries, it can be seen that the broader scope of strategic behaviour theory is most suited to the topic of the research and should enable the aim and objectives of the study to be fulfilled. Strategic behaviour theory is also seen as the approach likely to be of greatest practical help to firms considering embarking on IJV formation in Thailand and the ASEAN4 region.

It can be seen that strategic behaviour theory emphasises the topics of greatest interest to this study, namely host location choice decisions, parent companies’ contributions and their impact on the operation of the IJV, performance assessment, performance determinants, strategic fit, and, most fundamentally, the reason why companies embark on IJV formation in the first place.

The proposed framework for the research questions explores four important aspects of IJV formation in the context of Thailand as an ASEAN4 country: the characteristics of IJV activities, their distribution and trends; strategic motivation and location factors behind IJV formation; the contribution of IJV parent companies and their influence over the operational practices of the IJVs; and IJV performance measurement and determinants. This chapter has reviewed the literature relevant to each issue.

The literature indicates that more IJVs have been set up since the 1980s than in all the previous years combined. If in the past they were used to exploit peripheral markets or technologies, IJVs are currently seen as a crucial element of a business unit’s policy and as

a strategic weapon for competing within a firm’s core markets and technologies. Firms which do business through an IJV can maximise profit by improving their competitive position vis-à-vis their rivals (Kogut, 1988). The increasing use of IJVs is likely to continue well into the 21st century.

In addition, the strategic inducements for parent companies to establish IJVs have been reviewed, and motives have been found to overlap and to be interrelated. This chapter has accordingly grouped and summarised strategic motives identified in the literature. These include risk limitation; achieving economies of scale; exchanging or gaining access to technology and management know-how; and supporting initial overseas expansion.

The importance of the host country specific advantage has become of increasing strategic importance for MNEs. Accordingly, the factors which affect location choice decisions by foreign firms when considering IJV formation have also been discussed in this chapter. The host country government’s policies and regulation, market size, resource availability, socio-cultural similarity, and other factors are example of strategic impetus behind the decision of foreign firms on where to locate IJVs. Regarding the parent companies’ contributions, the literature shows that the major contributions to IJVs are technology, knowledge of the local environment and marketing, and financial capital.

This review of the literature has shown that there is no consensus among scholars regarding indicators for assessing IJV performance. This study has accordingly adopted an eclectic approach to measuring IJV performance. This includes objective measurement (the assessment of stability, duration, and survival); subjective measurement (a single perceptual assessment of the degree of satisfactoriness); and composite measurement (a multi-perceptual assessment with numerous dimensions).

Finally, previous studies have shown that a great number of factors influence IJV performance. However, special attention is paid in the present study to the background and antecedent factors most frequently identified in the literature as being particularly relevant in the context of developing countries. These include: 1) IJV age; 2) the total number of IJV parent companies; 3) symmetry of size of the IJV parent companies; 4) business

linkages between the IJV firm and its parent companies, and between the parent companies themselves; 5) the IJV parent companies’ prior experience of collaboration; 6) organisational learning within the IJV; 7) similarity of the national and organisational culture of the partners; 8) commitment within the IJV itself and between the IJV’s parent companies. These factors are regarded as influential determinants in developing “strategic fit” between the partners, one of the crucial factors for the success of IJVs.

Chapter 4

Research Methodology