Control and Performance in International Joint Ventures

The authors examine the meaning of control in international joint ventures (IJVs) and the relationships of potential means of control in such organizations to the performance satisfaction of the foreign partner. They propose a conceptual model that provides both a traditional ownership-focused internalization perspective on those issues and an integrated approach combining a broader transaction cost interpretation of control with a resource input-based bargaining power model. A set of simultaneous structural equations with endogenous explanatory variables provides multiple possible paths from various resource and power inputs through different means of control to perceived performance satisfaction. In such a model, intermediate variables act both as dependent and independent variables; thus the complex theoretical interactions of the variables are modeled more comprehensively and realistically than in single-equation models.To test the model and compare the theoretical relationships, the authors used data from a survey of managers in Norwegian multinational firms having at least one IJV. For structural equation modeling with latent variables, they used the LISREL VII program that simultaneously fits the measured variables to the latent variables and provides a maximum likelihood solution for the structural equation system. The results clearly reject the traditional internalization approach to IJV governance that relies strictly on ownership share to delineate degree of control. However, relative resource input has a strong relationship to relative bargaining of the parent companies, which then drives equity share, control over specific activities, and perceptions of overall control of the IJV. That result supports a bargaining-power-based model of IJV control. The relatedness of the strategic resources of the parent and the joint venture also drives specific control, implying that although transaction risk is important to governance, governance is provided by specific control rather than ownership level. Perceptions of performance are strongly and positively related to overall control.Those results suggest that specialized control provides both protection and exploitation of key resource inputs and is gained through increased bargaining power. Higher levels of specific control result in a perception of overall control and thereby satisfaction with perceived levels of IJV performance among foreign parent company managers. Interestingly, traditional exogenous determinants of IJV control and performance such as government mandates, cultural similarity, and international experience levels fail to provide significant effects. Rather, the focus is on endogenous aspects of the parent-IJV relationship, suggesting that the key to parent firm satisfaction with an IJV is control over operations that use key strategic inputs from the parent.