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Transactional characteristics, institutional environment and joint venture contracts

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Abstract

This study examines how transactional characteristics and the institutional environment influence contractual governance for international joint ventures (IJVs). Unlike previous studies that view joint venture contractual governance as a unidimensional construct (clause specificity), thus causing a debate upon whether IJV contracts should be more specific, contractual governance herein is defined as a three-dimensional construct that includes the extent to which contractual terms are clearly specified (term specificity), possible contingencies are accounted for (contingency adaptability), and joint venture parties are legally bound to the contract (contractual obligatoriness). Our analysis of IJVs in China suggests that term specificity and contractual obligatoriness increase when the proprietariness of resources to be invested in the IJV or the incompleteness of the host country's legal system increase. Contractual obligatoriness appears to be an increasing function of economic exposure and environmental volatility, whereas contingency adaptability in a contract rises when interparty dependency, investment uncertainty, and knowledge proprietariness intensify or when environmental hazards escalate. These results suggest that an IJV contract, if structured multidimensionally as above, can curtail opportunism and guide venture evolution at the same time. These contractual dimensions should not be prefixed but properly aligned with transactional and institutional characteristics. This alignment has strong implications in reducing transaction costs and spurring IJV evolution in the complex and volatile institutional environment.

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Notes

  1. Benchmarking with the industry standard is important when appraising contractual attributes for a specific IJV contract. In this study, all survey informants were asked to scale a contract's governance attributes with reference to the industry's standard.

  2. The resource-based view recognizes the importance of capability deployment as well. The competitive advantages of firms stem not merely from proprietary knowledge but also from the manner in which the knowledge is deployed (Prahalad and Hamel, 1990). Although this view does not address the issue of contractual governance, it argues that resource deployment should be aligned with external conditions and internal needs. When deployed knowledge is more proprietary or involves higher appropriability hazards, the firm should be more circumspect in the resource commitment process (Teece, 1998).

  3. Only equity manufacturing joint ventures fall within the scope of the present study. Export-oriented IJVs were excluded as they did not substantially interact with the local environment. The survey letter explained the concept of the three dimensions of contractual governance, illustrated major items in a typical IJV contract, and asked that a responding general or deputy general manager only reply if he or she had actively taken part in contract negotiations for the IJV.

  4. Our t-test comparison between foreign expatriates and local nationals did not find significant differences (P>0.10) between the two groups in responding to major survey items.

  5. In order to provide a triangulation with some of the mail survey results and between respondents within the same company, 20 senior IJV managers from 10 IJVs in Nanjing (two from each) were interviewed semi-structurally and asked to respond orally to questions raised in the questionnaire. The interview results demonstrated a high consistency with their answers on the questionnaire and between the two interviewees from each firm (Guttman split-half reliability R>0.79). To test the representativeness of the sample, the mean equity, investment, and sales of the sample firms were compared with the IJV population nationwide, using information obtained from the China Statistical Yearbook (1996). All t statistics were insignificant, indicating no significant bias from the population in these aspects.

  6. This technique uses the method of generalized least squares to fit GLMs. It allows us to incorporate and specify any degree of interaction (crossed effects) and nested effects regardless of the extent of confounding (SAS/STAT User's Guide, 1993).

  7. When separately modeled for a single variable, R 2 for knowledge proprietariness, economic exposure, and interpartner dependency are: (i) 0.11, 0.07, 0.01, respectively, in relation to term specificity; (ii) 0.14, 0.11, 0.06 to contingency adaptability; and (iii) 0.04, 0.06, 0.01 to contract obligatoriness. Similarly, R 2 for legal system incompleteness, government intervention, and environment volatility are: (a) 0.05, 0.13, 0.06, respectively, in relation to term specificity; (b) 0.04, 0.17, 0.11 to contingency adaptability; and (c) 0.11, 0.02, 0.18 to contract obligatoriness.

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Acknowledgements

I thank Professors Oliver Williamson and Nicolai Foss as well as the anonymous referees of JIBS for their insightful comments.

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  1. Yadong Luo

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  1. Yadong Luo
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Correspondence to Yadong Luo.

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Accepted by Nicolai Juul Foss, Departmental Editor, 8 September 2004. This paper has been with the authors for two revisions.

Appendix A1

Appendix A1

Selected items from the questionnaire

A. Contractual Governance (seven-point scale with 1 – very weak and 7 – very strong)

  1. 1

    Term Specificity

    1. a

      To what extent do you think the joint venture contract specified relevant terms concerning how to set up the joint venture?

    2. b

      To what extent do you think the joint venture contract specified relevant terms concerning how to operate and manage the joint venture?

    3. c

      To what extent do you think the joint venture contract specified relevant terms concerning how to cooperate, coordinate, and resolve conflicts between parties?

    4. d

      To what extent do you think the joint venture contract specified relevant terms concerning how to terminate the joint venture?

  2. 2

    Contingency Adaptability

    1. a

      To what extent do you think term specification occurred on issues that were particularly vulnerable to an uncertain environment (e.g., market and governmental policies) or external resources were flexible and resilient?

    2. b

      To what extent do you think the contract specified general principles or guidelines for handling various unanticipated contingencies that are likely to arise during IJV formation and operations?

    3. c

      To what extent do you think the contract provided alternatives or possible solutions for responding to different contingencies that are likely to arise during IJV formation and operations?

  3. 3

    Contractual Obligatoriness

    1. a

      How would you describe the degree of the overall legal binding of the contract for every party?

    2. b

      How would you describe the degree of legal penalization and economic punishment, as stipulated in the contract, against the breaching party?

    3. c

      How would you describe the degree of legal protection and economic reparation, as stipulated in the contract, for the aggrieved party?

B. Investment Characteristics that you identified or anticipated during contractual arrangements (seven-point scale with 1 – very weak and 7 – very strong)

  1. 1

    Knowledge Proprietariness

    1. a

      To what extent did you expect that knowledge or resources to be contributed to the venture by either or both parents would be rare and ownership-specific?

    2. b

      To what extent did you expect that knowledge or resources to be contributed to the venture by either or both parents would be difficult to codify?

    3. c

      To what extent did you expect that knowledge or resources to be contributed to the venture by either or both parents would be difficult to imitate?

    4. d

      To what extent did you expect that knowledge or resources to be contributed to the venture by either or both parents could generate sustainable return?

  2. 2

    Economic Exposure

    1. a

      How would you describe the vulnerability of your venture project to environmental changes in China?

    2. b

      How would you describe the project's levels of sunk costs and difficulty in adjusting product lines or market orientations in a changing environment?

    3. c

      How would you describe the project's levels of exit costs and termination difficulties for your venture project?

  3. 3

    Interpartner Dependency

    1. a

      To what extent did you expect that the Chinese and foreign partners would need each other's committed resources?

    2. b

      To what extent did you expect that the Chinese and foreign partners would both have to rely on joint collaborations?

    3. c

      To what extent did you expect that the Chinese and foreign partners would have to interact with and depend upon each other in order to get things done?

C. Institutional Environments that you identified or anticipated during contractual arrangements (seven-point scale with 1 – very weak and 7 – very strong)

  1. 1

    Legal System Incompleteness (the following questions refer to each of three items: intellectual property rights protection, industrial property rights protection, and other legal systems affecting FDI).

    1. a

      To what extent did you perceive each of the following legal systems affecting IJVs as underdeveloped in China?

    2. b

      To what extent did you perceive each of the following legal systems affecting IJVs as under-enforced in China?

  2. 2

    Governmental Intervention (the following questions refer to each of four items: negotiation participation, project control, personnel appointment, and IJV operations)

    1. a

      To what extent did you perceive the Chinese central government and its various agencies as intervening in your venture in the following four areas?

    2. b

      To what extent did you perceive the Chinese local government and its various agencies as intervening in your venture in the following four areas?

  3. 3

    Environmental Volatility (the following questions refer to each of six items: macroeconomic, regulatory/political, socio/cultural, consumers, suppliers, and competitors)

    1. a

      To what extent did you perceive the following sectors as unpredictable?

    2. b

      To what extent did you perceive the following sectors as volatile?

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Luo, Y. Transactional characteristics, institutional environment and joint venture contracts. J Int Bus Stud 36, 209–230 (2005). https://doi.org/10.1057/palgrave.jibs.8400125

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  • DOI: https://doi.org/10.1057/palgrave.jibs.8400125

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