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Joint venture instability and monitoring

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Author Info

  • Prabal Roy Chowdhury

Abstract

Purpose – The purpose of this paper is to build a theory of joint venture formation and instability based on synergy and monitoring. Design/methodology/approach – This problem is formulated as a dynamic game and solved using the notion of subgame perfect Nash equilibrium. Findings – It was found that monitoring problems may prevent the joint venture from forming at all. Moreover, joint venture formation usually involves over-monitoring, and ex post could involve cheating by one, or both the firms. Faced with the possibility of over-monitoring, firms may choose to under-invest in improving the input quality. The paper develops some testable implications of this theory. Originality/value – The contribution of this paper is both methodological, as well as in terms of generation of new insight. It provides a framework that allows one to analyze issues like both sided moral hazard, as well as monitoring in joint ventures. New insights are that monitoring issues can take several forms including over- and under-monitoring by partner firms, and, there is a linkage between such monitoring problems and joint venture instability.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Indian Growth and Development Review.

Volume (Year): 2 (2009)
Issue (Month): 2 (September)
Pages: 126-140

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Handle: RePEc:eme:igdrpp:v:2:y:2009:i:2:p:126-140

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Related research

Keywords: Joint ventures; Performance monitoring; Venture capital;

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References

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  1. Yu, Eden S. H. & Chi-Chur, Chao, 1996. "Are wholly foreign-owned enterprises better than joint ventures?," Journal of International Economics, Elsevier, vol. 40(1-2), pages 225-237, February.
  2. Das, Satya P, 1999. "Direct Foreign Investment versus Licensing," Review of Development Economics, Wiley Blackwell, vol. 3(1), pages 86-97, February.
  3. Sinha, Uday Bhanu, 2001. "Imitative innovation and international joint ventures: a dynamic analysis," International Journal of Industrial Organization, Elsevier, vol. 19(10), pages 1527-1562, December.
  4. Miller, R-R & Glen, J-D & Jaspersen, F-Z & Karmokolias, Y, 1996. "International Joint Ventures in Developing Countries. Happy Marriages?," Papers 29, World Bank - International Finance Corporation.
  5. Svejnar, Jan & Smith, Stephen C, 1984. "The Economics of Joint Ventures in Less Developed Countries," The Quarterly Journal of Economics, MIT Press, vol. 99(1), pages 149-67, February.
  6. Mukherjee, Arijit & Sengupta, Sarbajit, 2001. "Joint Ventures versus Fully Owned Subsidiaries: Multinational Strategies in Liberalizing Economies," Review of International Economics, Wiley Blackwell, vol. 9(1), pages 163-80, February.
  7. Combs, K. L., 1993. "The role of information sharing in cooperative research and development," International Journal of Industrial Organization, Elsevier, vol. 11(4), pages 535-551.
  8. Marjit, Sugata, 1991. "Incentives for cooperative and non-cooperative R and D in duopoly," Economics Letters, Elsevier, vol. 37(2), pages 187-191, October.
  9. d'Aspremont, Claude & Jacquemin, Alexis, 1988. "Cooperative and Noncooperative R&D in Duopoly with Spillovers," American Economic Review, American Economic Association, vol. 78(5), pages 1133-37, December.
  10. Ray Chaudhuri, Prabal, 1995. "Technological asymmetry and joint product development," International Journal of Industrial Organization, Elsevier, vol. 13(1), pages 23-39, March.
  11. Roy Chowdhury, Indrani & Roy Chowdhury, Prabal, 2001. "A theory of joint venture life-cycles," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 319-343, March.
  12. Choi, Jay Pil, 1993. "Cooperative R&D with product market competition," International Journal of Industrial Organization, Elsevier, vol. 11(4), pages 553-571.
  13. Satya P. Das, 1998. "On the choice of international joint venture: the role of policy moral hazard," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 2(2), pages 135-150.
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