Causes of international joint venture instability:
An institution-based view
Bachelor Thesis Organization & Strategy
Academic Year: 2009-2010
Author: K.F. van den Oever
ANR: S545493
Supervisor: Dr. ir. J.S. Small
Words: 7399
Management summary
The purpose of this paper was to find out to what extent the institution-based view can explain
instability in international joint ventures. The results showed that the institution-based view
can explain instability in international joint ventures to some extent. Differences in internal
institutions between both partners in international joint ventures were found to be the root of
some causes of international joint venture instability. First, differences in internal institutions
could lead to interpartner conflict in co-management, which in turn leads to international joint
venture instability. Second, those differences also lead to cultural differences which were also
found to be a cause of international joint venture instability. Third, differences in internal
institutions could also lead to differences in characteristics of the parents of the international
joint venture. This was also found to be a cause of international joint venture instability.
Furthermore, the age of the international joint venture was found to be moderator for these
relations. This means that the effect of the differences in internal institutions on the causes of
international joint venture instability diminished as time passes.
Besides these findings, it was also found that the effects of the external environment on
international joint venture instability were moderated by the normative institutions of the
international joint venture. Hence, it could be the case that the government in a country where
the international joint venture is situated would change policies. This could change bargaining
power for one partner or could lead to a reorganization and thus instability. However the
normative, in other words cultural, institutions can minimize this effect.
By means of this study, international joint venture instability is approached from a different
perspective and broadened the understanding of this phenomenon. The institution-based view
helps to explain causes of IJV instability in a way that neither transaction cost point of view
nor the resource-based view can. By adding this institution-based view to the already wellestablished economic ones, a more complete understanding of IJV instability emerges. This
results in neither an overly sociologic, nor an overly economic explanation of IJV instability.
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Table of contents
1. Introduction
3
1.1. Introduction
3
1.2. Problem Indication
3
1.3. Problem Statement
5
1.4. Research Questions
5
1.5. Relevance
5
1.6. Research Design and data collection
6
1.7. Structure of the thesis
6
2. What is the conceptual background of the institution-based view?
7
2.1. Defining institutions
7
2.2. Defining the institution-based view
8
3. What are the causes of international joint venture instability?
13
3.1. Defining IJV instability
13
3.2. Creating a model for IJV instability
15
3.3. Summary
19
4. What is the relationship between the institution-based view and international joint
venture instability?
20
4.1. Creating a model
20
4.2. Discussion on causes of IJV instability
21
5. Conclusions and discussion
24
5.1. Conclusion
24
5.2. Limitations
25
5.3. Academic and practical recommendations
26
6. References
27
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Chapter 1 Introduction
1.1 Introduction
One of the most popular entry modes is the international joint venture. A definition of an
international joint venture given by Hall (1984) is the following: “two or more organizations
(or persons) sharing resources to achieve some common business purpose abroad. The
combining of resources by the parties across foreign national borders provides ample
opportunities for gain as well as for loss.” (Hall, 1984, p. 8). International joint ventures can
have the structure of majority/minority or 50/50 proportions (Hall, 1984). Yeung and
Petrosyan (2006) also argue that international joint ventures can create opportunities to
rapidly create economies of scale and learn new skills and technologies that otherwise would
be very difficult to obtain on their own. Moreover, because of increasing globalisation and
internationalisation, the importance of international joint ventures is increasing rapidly.
1.2 Problem Indication
According to Kogut (1988) international joint ventures are an efficient solution to the hazards
of economic transactions. It can also enhance market power via collusive agreements and it
can be a vehicle in which organizational knowledge is exchanged and imitated (Kogut 1988).
However controlling and delimitating the exchange and imitation of organizational
knowledge can be a cause of instability. Hence, the fact is that international joint ventures can
have advantages, but are also subject to risks.
International joint venture instability is already researched from a transaction cost point of
view (Lu & Hébert, 2005), reciprocity and competition (Kogut, 1989), descriptions of
international joint ventures that have already ended (Blodgett, 1992) or knowledge and
bargaining power of a firm in an international joint venture (Inkpen & Beamish, 1997).
However, as Barley and Tolbert (1997, p. 93) have pointed out, “organizations are tangled in
a web of values, norms, rules, beliefs, and taken-for-granted assumptions, which are at least
partially of their own making” (Barley & Tolbert, 1997, p.93). When two organizations form
an international joint venture these „values, norms, rules, beliefs and assumptions‟, also called
institutions, can become conflicting. It is important to note that the international joint venture
is studied in this thesis and not the national joint venture, because the international joint
venture is more subject to different institutions arising from the environment. Furthermore, it
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would not be in the scope of this thesis to also incorporate the national joint venture. When a
firm forms an international joint venture with a firm in another country, this firm will not only
have to adapt to the internal institutions of the new international joint venture, but also to the
different external institutions in the foreign country. Another point to note is that traditional
international joint ventures are studied and not joint ventures between a firm and a NGO or
university. This is also done, because other approaches then would have to be taken into
account and it is not in the scope of this thesis.
When both organizations share resources in their own country with each other, they will
generally have the same institutions, because they exist in the same culture. The institutionbased view takes these institutions into account. Also, as Peng (2009) argues, institutional
theory can be seen as complementary for the industry-based view and the resources-based
view. This statement is illustrated in figure 1.1. The industry-based view has been criticized
for ignoring histories and institutions and not paying adequate attention to context (Narayanan
& Fahey, 2005). So, this view does not incorporate institutions and pressures from the
environment. The resource-based view has been criticized likewise, because of its “little effort
to establish appropriate contexts” (Priem & Butler, 2001, p. 32). In one context, resources can
be valuable, rare, and hard-to-imitate, but in other contexts it could be the opposite
(Brouthers, Brouthers & Werner, 2008). Thus the institution-based view has been chosen here
to analyze international joint venture instability.
Figure 1.1 The institution-based view: A third Leg of the Strategy Tripod (Peng, 2009, p.15)
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1.3 Problem statement
Following from the problem indication, the following question is derived:
To what extent can the institution-based view be used to explain instability in international
joint ventures?
As can be seen in the problem statement, the thesis is restricted to the institution-based view
as a means to explain international joint venture instability. However, the „history‟ of the
institution-based view is explained, so also some explanation about the institutional theory is
given. This is done, because this explains why the institution-based view is better than the
institutional theory. Second, as already mentioned, this thesis is restricted to instability in
traditional international joint ventures. It would take very different approaches and hence is
not in the scope of this thesis to study national joint ventures or joint ventures which do not
consist of two firms, but a NGO and a firm for example.
1.4 Research Questions
1. What is the conceptual background of the institution-based view?
2. What are the causes of international joint venture instability?
3. What is the relationship between the institution-based view and international joint
venture instability?
1.5 Relevance
The academic relevance of this thesis is that it can elaborate more on international joint
ventures, because it analyzes international joint ventures from a different perspective. The
academic contribution of this paper is that it provides new insights in international joint
venture instability. Later in this thesis, the point is stressed that international joint venture
instability has to be researched more by means of a dynamic approach, rather than a static
approach. The institution-based view takes into account the histories of the firms and thus is a
more dynamic approach, rather than the static transaction cost point of view. Also, when
choosing for an entry mode, these insights can provide further explanation of the risks of an
international joint venture. When a company is involved in an international joint venture, it
can use these insights to increase the stability in that international joint venture, so this thesis
is also of managerial relevance.
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1.6 Research Design and data collection
This thesis is of descriptive nature and the method for data collection is a literature review.
The institution-based view and the causes of international joint venture instability were
researched in this way. Web of science and the UvT-catalog were used for collecting the data.
The UvT-catalog makes use of databases such as ABI/Inform and JSTOR. In this way, only
academic articles which have proven their scientific significance were found on the subject.
Also citation analysis was used for finding more literature. Citation analysis provided more
recent articles and articles with criticism against the older, more extreme articles of the gurus
in a particular field. To ensure that the data was of excellent quality, only top journals in the
field of organization and strategy were used as a foundation for this thesis.
Keywords that were used to find appropriate articles are: joint venture instability, institutional
theory, institution-based view. By means of citation analysis, more articles were found to base
this thesis on. After enough useful academic literature was found, the connection between
these articles was investigated and the research questions were answered. Finally the problem
statement was answered in the last chapter.
1.7 Structure of the thesis
In the second chapter the institution-based view is thoroughly explained and discussed. The
third chapter elaborates more on the causes of international joint venture instability. These
two chapters are combined in chapter four, where the relationship between the institutionbased view and the causes of international joint venture instability are explored. Finally the
last chapter concludes and the results of this thesis are discussed.
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Chapter 2
What is the conceptual background of the institution-based view?
This chapter describes the conceptual background of the institution-based view. First,
institutions are defined. Then, the conceptual background of the institution-based view is
defined and discussed.
2.1 Defining institutions
The concepts of institutions and institutionalization have been defined in different ways in the
academic literature. Thus, the first step is to define institutions and institutionalization as they
are used in this thesis. The following list provides some of the definitions of institutions
which are used in the academic literature:

“Institutions are humanly devised constraints that shape human interaction” (North
1990, p.3);

Institutions represent a social order or pattern that has attained a certain state and
property (Jepperson 1991);

Institutionalization (Institutions) constrain in two ways: by bringing it within a
normative order, and by making it hostage to its own history (Selznick 1992);

Barley and Tolbert (1997, p. 5) define institutions as “shared rules and typifications
that identify categories of social actors and their appropriate activities or relationship”;

Scott (2001) defines institutions as social structures that have attained a high degree of
resilience, provide stability and meaning to social life and by definition connote
stability, but are subject to change processes.
The definitions used by these institutionalists view institutions as background conditions.
Clougherty (2005) and Oliver and Holzinger (2008) already criticized this treatment of
institutions; however its deficiency becomes even greater in the landscape of emerging
economies (Lau & Bruton, 2008). This is very important to take into account, because
international joint ventures often take place in the landscape of an emerging economy.
Kostova, Roth and Dacin (2008) use the following definition for institutions:
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
„Institutions are conceived of as enacted and socially constructed shared
understandings and as outcomes of a social process in which the organization and its
subunits and actors are actively involved.‟ (Kostova et al., 2008, p. 1001)
The first 5 definitions view institutions as exogenous constraints that organizations have to
consider, but organizations can also conceive their own institutions, so the definition of
Kostova et al., (2008) is used in this thesis. This is especially important in international joint
ventures, because two different types of firms with different institutions form one firm.
According to this definition, this international joint venture can conceive its own institutions
and is not only constricted to the already established institution from both parents.
2.2 Defining the institution-based view
Institutional theory is a very diverse school of thought across several disciplines, all of which
focus on different sorts of institutions, which leads to several different approaches to
institutional theory. There are roughly two types of institutional theory, “old” institutional
theory and neoinstitutional theory. As opposed to the neoinstitutional emphasis on “statics,
outcomes, cognition, and the dominance and continuity of the environment”(Hirsch &
Lounsbury, 1997, p. 406), old institutionalism focuses on “dynamics, change, social
construction, and values” (Hirsch & Lounsbury, 1997, p. 406) and emphasizes a more
subjective, agency-dominated view. According to Oliver (1997) Zukin and DiMaggio (1990)
argue that the neoinstitutional view suggests that the motives of human behaviour extend
beyond economic optimization to social justification and social obligation. Therefore, humans
are not only driven by optimization of their economic interests, but are also striving for social
justification. Thus, the transactional cost point of view cannot fully explain every
phenomenon. Hence, managers will have to conform to these social expectations and this will
contribute to organizational success and survival according to institutional theorists (Baum
and Oliver, 1991; Carroll and Hannan, 1989; Kostova, Roth and Dacin, 2008). So by meeting
these expectations, these organizations are rewarded and can continue to do business.
From a sociological perspective, Scott (1995) suggested that there are three pillars of the
institutional environment: the regulative pillar, the normative pillar and the cognitive pillar.
The regulative pillar refers to rules and laws that exist to ensure stability and order in
societies. The normative pillar refers to social values, cultures, and norms. The cognitive
pillar refers to the established cognitive structures in society that are taken for granted. By
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means of these pillars, institutional distance can be defined. „Institutional distance is defined
as the extent of similarity or dissimilarity between the formal or regulative and the informal or
normative and cognitive aspects of institutions of any two countries‟ (Gaur & Lu, 2007, pp.
87-88). According to Scott (1995), it is reasonable to group the normative and cognitive
aspects, because these two aspects are quite similar to each other. These regulative and
normative aspects define the differences in institutional environments (Gaur & Lu, 2007). The
central premise of institutional theory used these days is that organizations adopt structures
and practices that are „isomorphic‟ to those of the other organizations as a result of their
search for legitimacy (Yiu & Makino, 2002). Isomorphic means the degree of similarity
between organizations. When a firm is isomorphic to another, this means that these firms look
like each other.
These three pillars could have been used to explain international joint venture instability.
However, criticism against the institutional theory is recently growing (i.e. Kostova et al.,
2008; Alvarez, Mazza, Pedersen, and Svejenova, 2005) and that should be taken into account.
First, institutional distance is not very well defined (Phillips, Tracey & Karra, 2009). The
level of institutionalization in a country is not captured in the recent definition (Phillips et al.,
2009). This means that the degree of uncertainty of what institutions in the host country are
used is high. In other words, the institutions in the host country are weakly entrenched
(Phillips et al., 2009). This supplemental dimension gives a more accurate estimate of the
institutional distance, as it is not only measured by the degree of institutional difference. This
is depicted in figure 2.1. Phillips et al., (2009) show this with the following example. A
Spanish hotel business manager entering the Chilean market does not have to worry about
huge institutional differences, however the degree of institutional uncertainty in Chile is high
and thus the institutional distance is medium. The old concept of institutional distance would
argue that the institutional distance would be small, because there are not many differences
between institutions, which would not be very accurate.
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Figure 2.1 Degree of institutional distance (Adapted from Phillips et al., 2009)
Second, an important tenet of institutional theory, which is already mentioned, is that there is
substantial isomorphism among organizations that result from the adoption and diffusion of
certain business models, practices, and structures established as a standard in the respective
organizational field (Kostova et al., 2008). Isomorphism is the phenomenon that organizations
look like each other. However, Kostova et al., (2008) argue that multinational corporations
(MNCs) are not subject to local isomorphism pressures. Since these MNCs bring something
different to a host country, it is less likely they will be expected to adopt locally established
practices. Furthermore, MNCs might also be viewed as belonging to a different class
altogether, because of their foreignness and as a result may be excluded from local isomorphic
pressures (Kostova et al., 2008).
Third, another principle of institutional theory, which is already mentioned, is that legitimacy
is critical for organizational survival and this is achieved through isomorphism, where
organizations become similar to each other (Yiu & Makino, 2002). However, Alvarez et al.,
(2005) claim that social actors strive for a balance between seeking legitimacy through
isomorphism and maintaining unique identities to differentiate themselves. So according to
them, legitimacy is not only gained by complying with existing institutions, but also through
innovation and creativeness. Also, at least some institutions „result from successful attempts
of extraordinarily creative, innovative, and productive individual actors who have the vision
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and genius not to accept or fine-tune existing ways of doing things but rather to consciously
change the boundaries of what is possible‟ (Zucker & Darby, 1997, p. 503).
Kostova et al., (2008) argue that the neoinstitutional theory should be blended with the “old”
institutionalism. Recently, Peng, Sun, Pinkham and Chen (2009) suggested a new approach:
the institution-based view. It is important to note that institution-based theory is different from
institutional theory in that institutional theory refers to the sociological version of the
institutional literature (DiMaggio & Powell, 1983). The institution-based view treats
institutions as independent variables, focuses on dynamic interaction between institutions and
organizations, and considers strategic choices as the outcome of such an interaction (Peng,
2002). This is summarized in figure 2.2.
Figure 2.2 Institutions, Organizations, and Strategic Choices (Peng, 2002, p. 253)
As shown in figure 2.2, strategic choices are not only bounded by industry conditions and
firm-specific resources, but also by formal and informal constraints. The formal constraints
are similar to the regulative aspects of Scott‟s (1995) „three pillars‟ and the informal
constraints are similar to the normative aspects of Scott‟s (1995) „three pillars‟. The two core
propositions of the institution-based view, based on the work of Peng et al., (2009), are the
following:
1. “Managers and firms rationally pursue their interests and make strategic choices
within the formal and informal constraints in a given institutional framework.” (Peng
et al., 2009, p. 67);
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2. “While formal and informal institutions combine to govern firm behaviour, in
situations where formal constraints are unclear or fail, informal constraints will play a
larger role in reducing uncertainty, providing guidance, and conferring legitimacy and
rewards to managers and firms.” (Peng et al., 2009, p. 68)
Following the institution-based view logic, institutions will help and constrain companies on
their quest to gain legitimacy. The institution-based view is used in this thesis to investigate
international joint venture instability. In the next chapter the causes of international joint
venture instability are analyzed and a conceptual framework is developed.
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Chapter 3
What are the causes of international joint venture instability?
This chapter discusses the causes of International Joint Venture (IJV) instability. First, IJV
instability is defined. Then, causes of IJV instability are reviewed.
3.1 Defining IJV instability
IJV instability has become one of the most active domains of scholarly work in international
management (Parkhe, 1993). There are numerous articles about this phenomenon. However,
some authors use the term stability to refer to whether the IJV remains an ongoing concern or
terminates. But this definition is the definition of survival (Beamish & Lupton, 2009).
According to Yan and Zeng (1999), Franko‟s (1971) pioneering study of IJVs approached IJV
instability as termination of the IJV or changes in ownership structure. In contrast to this
definition, Killing (1983) defines IJV instability as reorganizations or contractual
renegotiations. The use of this definition is also found in several other studies (Blodgett, 1992,
Lee & Beamish, 1995). The more process-oriented perspective of Killing (1983) is important,
because the focus on the death rate of the IJV has been shifted towards the influencing factors
that trigger IJV instability (Yan & Zeng, 1999). Moreover, Yan and Zeng (1999) argue that
the literature is deficient and limited in some important aspects.
1. There is a variety of measures of instability;
2. We know little about the relationships between the various measures of IJV instability;
3. The choice of measurement is often data-driven, for the researcher‟s convenience;
4. Much previous work has depended solely on static, second-hand data sources.
So the first objective would be to define IJV instability in a better way, before reviewing
which causes there are for IJV instability. Yan and Zeng (1999) propose the following
redefinition:
„Instability refers to the extent to which the IJV alters its strategic directions, renegotiates its
contract/agreements, reconfigures its ownership and/or management structures, or changes
the relationship with its parents or the relationship between the parents that may have a
significant effect on the venture‟s performance.‟(Yan & Zeng, 1999, p. 405)
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This definition is used in this thesis, because it captures the following concepts. First, this
redefinition captures the concept of neutralization. Because stability and instability are
defined as the opposite of each others, instability would mean the opposite from the stable
state, and the stable state would mean the normal organizational state of the firm. However,
from an organizational change perspective, organizations are not stable, they continuously
evolve (Poole & Van de Ven, 1989). Thus, instability is not necessarily a bad thing.
Second, an IJV can have a good performance, but it still can change its strategic directions,
because management could believe this can lead to an even better performance. So, the
survival rate of an IJV is something different then the instability of the IJV.
Third, it is also important to note that in the definition used by Yan and Zeng (1999) the
alterations can have a significant effect on the performance of the IJV, and not necessarily a
negative effect. This reconceptualization of instability also calls for a shift from a static
approach to a dynamic approach, because stability describes a pattern of behaviour or
alterations of the pattern over a period of time (Yan & Zeng, 1999). So instability is not a
moment in the history of the IJV, but it is a period. Thus research should be longitudinal and
not based on one moment in time.
Fourth, Yan and Zeng (1999) also discuss the multiple facets of instability. “First, new
contingencies may be created when the IJV redirects its strategic foci, changes its key
objectives, repositions in the markets, or undertakes major growth or downsizing.” (Yan &
Zeng, 1999, p. 407) These changes can arise from environmental, interorganizational and
intraorganizational changes. The second facet is that instability always occurs when partners
renegotiate their contracts. This is so, because their contracts define the legal and institutional
frameworks wherein the IJV operates. The third concept is that reconfiguration of the
venture‟s ownership/control structure also represents a major cause of instability, because it
alters new bargaining dynamics and/or alters strategic stakes. The last facet of instability is
that an IJV will become unstable when one of the parents changes its amount of decision
autonomy rendered to the IJV management or in the IJV‟s role in each parent‟s overall
business. An example of the IJV‟s role in each parent‟s overall business is transactions
between the parent and the IJV (Yan & Zeng, 1999).
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3.2 Creating a model for IJV instability
In prior studies (e.g. Barkema & Vermeulen, 1997, Yan & Zeng, 1999), IJV instability has
been treated as a dependent variable, and in that way various factors have been identified,
including interpartner conflict, cross-cultural differences, control/ownership structures,
characteristics of parents and external environments as driving factors for IJV instability.
These causes are illustrated in figure 3.1.
Interpartner conflict in comanagement
Cross-cultural differences
Difference in
characteristics of parents
Control/Ownership
structures
International joint
venture instability
Learning and bargaining
power
External Environment
International joint
venture's performance
Figure 3.1 Causes of IJV instability
In this section, these causes will be studied and analyzed.
Interpartner conflict in co-management
One of the characteristics of an IJV is shared management between partners from different
countries. Partners could disagree on almost anything. Therefore, interpartner conflict in comanagement is often a driving force for instability (Killing, 1983; Kogut, 1989). Interpartner
conflict can be reduced, when the IJV is performing well (Yan & Gray, 1994). This is so,
because trust between the two firms will increase and thus interpartner conflict in comanagement will be reduced (Yan & Gray, 1994). Subsequently, poor performance can lead
to conflict. This has been found by Doz (1996), who found that poor performance often
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creates conflict and suspicion between partners. However, an important factor which has not
been researched yet is the characteristics of the IJV manager. It could be that IJV managers
have to be more open-minded and more flexible than other managers. This is discussed more
thoroughly in the next chapter. According to Yan and Zeng (1999), Harrigan (1988) also
found that differences between the partners in founding goals, strategic resources, and
corporate cultures were responsible for shorter IJV duration. This brings us to the next cause:
cross-cultural differences.
Cross-cultural differences
Cultural differences can complicate communication, decision making and managing
personnel (Child & Markoczy, 1993). Moreover, these differences often influence the way
managers make strategic decisions and solve problems. According to Yan and Zeng (1999),
Turner (1987) illustrates this with the following example, Japanese and American managers
tend to see interfirm alliances very differently, the former treat them as primarily
interpersonal relationships whereas the latter see them as enduring by design, irrespective of
the specific managers involved.
Barkema and Vermeulen (1997) argue that the different dimensions of cross-cultural
differences have different effects on IJV instability. They found that interpartner differences
in power distance, individualism, and masculinity did not affect IJV survival and thus
stability, while differences in uncertainty avoidance and long-term orientation have a
significant negative impact on IJV survival. A lack of long-term orientation can be a problem,
because it may signal a lack of long-term commitment. In case of individualism, a difference
may be desirable, because a conflict is more likely to occur between similarly individualistic
partners (Beamish & Lupton, 2009). Here, management responsibilities have to be clearly
delineated and when conflicts arise, management should refer to a set of previously agreedupon rules (Beamish & Lupton, 2009). By doing this, IJV stability may be improved.
Alternatively, Park and Ungson (1997) found that the greater the cultural distance, the less
likely the venture is to dissolve.
These were all cases of differences in national culture, however differences in organizational
culture should be included too. Sim and Ali (2000) found that psychic proximity also has a
significant effect on IJV instability in developing countries. They measured psychic proximity
as the extent of foreignness between partners in terms of communication and differences in
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work attitudes and business practices. The notion behind this psychic proximity is the less
difficulties in communications and the more similar the work attitudes and business practices,
the more stable the IJV is. Fey and Beamish (2001) also found that IJVs with similarity in
organizational culture had a higher rate of success. So, the internal environment of the parent
firms can also have an impact on stability in IJVs.
Difference in characteristics of parents
According to Yan and Zeng (1999), Franko (1971) concluded that policy changes in the
multinational enterprise parent are largely responsible for IJV instability. Other parent
characteristics are also regarded as influencing factors, such as: parent firm‟s financial
problems (Hennart, Roehl & Zietlow, 1999) and partner‟s prior IJV experience (Harrigan,
1988; Park & Russo, 1996; Makino & Delios, 1996). However, Reuer, Zollo and Singh
(2002) pointed out that partner‟s prior general IJV experience does not affect the frequency of
governance changes. Their research points out that partner‟s prior IJV experience with the
same partner decreases the frequency of governance changes. This can be explained by
developed inter-organizational routines and partner familiarity.
There is also empirical evidence that the likelihood of a stable and long-lasting IJV depends
crucially on the types of interactions between the parent firm and the IJV over time
(Nakamura, Shaver & Yeung, 1996). Other research (Luo, Shenkar, & Nyaw, 2001) pointed
out that U.S. parents prefer to have more dominant overall control of Chinese joint ventures,
while Chinese partners preferred to have specific control of certain areas, because they are
more interested in technology transfer than in overall control. Sim and Ali (2000) also found
that for developing countries the IJV is likely to be more stable when both parents have
vertical linkages with the IJV. Vertical linkages are also known as buying and selling relations
between the supplier and customer. This means that the more the amount of buying and
selling relations with the IJV, the greater the degree of dependence of an IJV on the parents,
and the more mutually interdependent they are. This interdependency in turn leads to more
stability in the IJV. Sim and Ali (2000) also conclude that cooperation between parents helps
develop mutual trust and thus leads to a stable relationship, which in turn leads to a more
stable IJV. It is however important to note that in this study, cooperation was only significant
in developed countries.
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Control/ownership structure
Bleeke and Ernst (1991) found that IJVs with an even split ownership had a higher success
rate (60%) than ventures dominated by one owner (31%). Dhanaraj and Beamish (2004) also
found that when a firm holds a very small stake in an IJV, typically less than 20%, the IJV is
less likely to be stable, because this may signal lack of commitment. Sim and Ali (2000) also
found support for this claim; they too found that shared control by both parents leads to more
stability. However, Killing (1993) argues that a dominant management structure can minimize
coordination costs and hence outperform shared control IJVs.
Learning and bargaining power
Another cause for IJV instability that is positively related to the ownership structure is
bargaining power (Nakamura, 2005). The more the local partner learns about the technology
of the foreign partner, the more bargaining power it will attain and this eventually leads to an
increased probability of their buyout. In this case the local partner will want to renegotiate
about the ownership structure and this will result in an unstable IJV. This could also be the
case for the foreign partner, but in that case it is about the management skills in local
production and marketing instead of the technology. This problem will become even more
critical when the partners want to outpace each other‟s learning so as to gain a competitive
advantage (Yan, 1998). This makes the IJV less stable. This skill spill-over can be reduced if
the provider of these intangible skills owns substantial equity in the operations utilizing those
skills (Nakamura, 2005). This is the case, because ownership includes not only the entitlement
to returns from this asset, but also the rights of control over all aspects of the use of the asset
except those rights which are explicitly contracted away (Nakamura, 2005).
Beamish and Lupton (2009) concluded from previous research that partners may allow access
to each other‟s knowledge, but they should not necessarily attempt to acquire it immediately.
This behaviour will likely result in an unstable IJV, unless the partner has agreed to transfer
this knowledge. It is also important to note that the legal environment influences the
effectiveness of firms‟ technology spill-over protection to a large extent (Ostergard, 2000).
Thus, the legal environment can also reduce the probability of instability. Moreover,
according to Nakamura (2005), in many developing countries the host governments require
the availability of technology transfer when a foreign partner wants to form an international
joint venture with a local partner in that country, so institutional factors also play a role in the
process of forming an IJV. Brouthers and Bamossy (1997) found that such intervention in
Koen van den Oever - 545493
18
negotiations by governments can shift the balance of power in favour of the local partner, but
not necessarily in favour of the IJV. In this way, the government can increase the probability
of instability in an IJV. Nakamura (2005) concludes that changes over time in the business
environment characterized by the positions of the foreign partner‟s and local partner‟s
intangible assets can significantly reduce the ownership share of the foreign partner in the IJV
over time. This business environment, also known as the external environment, is discussed in
the next section.
External environment
Another cause for IJV instability is the external environment. Examples for external
environment changes are local government policies and industry structures. Major changes in
the external environment affect international business operations and contribute to IJV
instability (Blodgett, 1992; Brewer, 1992; Boddewyn & Brewer, 1994). Also, IJVs are found
to be less stable in industries that experience intensive consolidation or volatile growth
(Kogut, 1989; Kogut, 1991).
IJV’s performance
Killing (1983) and Yan and Gray (1994) observed that good performance leads to a
stabilization of IJVs. As already mentioned, good firm performance can lead to less
interpartner-conflict and a lower frequency of changes in bargaining power, which in turn
leads to more stability in the IJV (Yan & Gray, 1994). On the contrary, poor performance
often leads to suspicion between partners and interpartner conflict, which in turn leads to a
more unstable IJV (Doz, 1996).
3.3 Summary
In this chapter, a definition for IJV instability has been found, a framework has been
developed and the causes of IJV instability have been analyzed. Table 3.1 illustrates by means
of a summary which causes have a positive or a negative effect on IJV instability.
Cause
Interpartner conflict in co-management
Cross-cultural differences
Difference in characteristics of parents
Evenly divided control/ownership structure
Learning and bargaining power incentives
Changes in external environment
IJV‟s performance
Positive relation
X
X
X
Negative relation
X
X
X
X
Table 3.1 Nature of relations between causes of IJV instability and IJV instability
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Chapter 4
What is the relationship between the institution-based view and
international joint venture instability?
In this chapter, the institution-based view is used to explain international joint venture
instability. First, a model is presented, which illustrates which causes of IJV instability can be
explained by means of the institution-based view and illustrates aspects of the IJV instability
which have an effect on the relations between the causes and IJV instability. Thereafter, all
factors will thoroughly be discussed.
4.1 Creating a model
Interpartner conflict
in co-management
Age of the IJV
Cross-cultural
differences
Difference in
internal
institutions
Difference in
characteristics of
parents
International Joint
Venture instability
Normative Institutions
External
Environment
Figure 4.1 The effect of institutions in IJV instability
By means of the conclusions made in chapter 3, the relevant causes, which can be explained
by means of the institution-based view, are identified. The causes interpartner conflict, crosscultural differences and differences in characteristics of the parent firms are driven by
differences in internal institutions. The effects of differences in internal institutions are
diminished as time passes and the IJV becomes older. The effect of the external environment
which can be a cause for IJV instability is found to be moderated by normative institutions.
Koen van den Oever - 545493
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4.2 Discussion on causes of IJV instability
Interpartner conflict in co-management
One underlying factor for interpartner conflict in co-management can be the characteristics of
the manager. This however, is not yet been researched (Beamish & Lupton, 2009). According
to the institution-based theory, managers make decision that are constrained by formal and
informal institutions, and are pursuing legitimacy. So, the manager himself is constrained in
his decision-making and is pursuing legitimacy too. Both partners are trying to get legitimacy
in the IJV itself. However, the partner who is already in the country where the IJV is set up is
not seeking legitimacy in the country itself; this local partner is mostly seeking for internal
legitimacy. The local partner already has some external legitimacy, because he is already
accepted in the country, because it is the company‟s home. The foreign partner is seeking for
internal legitimacy as well as external legitimacy. It can be reasonably argued that these
quests for legitimacy can be a cause for interpartner conflict, because both partners have
different normative and cognitive institutions. Something can be normal to one partner, but at
the same time it can be outrageous for the other.
As Kostova and Zaheer (1999) also point out that the external rules and norms, in other words
institutions, in the local environment may be different or even in conflict with the internal
rules and norms of the firm. Time can stabilize the IJV, because legitimacy will be attained in
due time. This also means that the firm has developed his own internal institutions. This in
turn leads to less interpartner conflict, because both partners have the same normative
institutions. According to Freeman, Carroll and Hannan (1983), Stinchcombe (1965) argues
that organizations suffer from a „liability of newness‟, a greater risk of failure, because they
have a low level of legitimacy. As time passes, structures stabilize and ties with the
environment become more durable (Freeman et al., 1983). Hence, it can be argued that the
influence of the degree of difference in internal institutions on interpartner conflict is
moderated by the factor time.
The costs of this „liability of newness‟ can be split between two categories: relational hazards
and unfamiliarity hazards (Gaur & Lu, 2007). Unfamiliarity hazards arise from a lack of
knowledge of the host environment (Caves, 1971) and relational hazards arise from problems
in managing relationships, like opportunistic behaviour, a lack of trust and monitoring costs
(Buckley & Casson, 1998). Interpartner conflict is a problem arising from relational hazards.
Koen van den Oever - 545493
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In time, the lack of trust is diminished between partners, which leads to less interpartner
conflicts. However, the higher the institutional distance between the countries of both parent
firms, the higher the relational hazards (Xu & Shenkar, 2002), which in turn leads to more
interpartner conflict.
Cross-cultural differences
This cause is also related to the institutional distance between two firms. However, with
regard to Scott‟s (1995) „three pillars‟, cross-cultural differences only capture the cognitive
and normative pillars. Thus institutional distance is much more than cultural distance. With
regard to the institution-based view, culture can be seen as an informal constraint. These
informal constraints will take a larger role, when formal constraints, in other words rules and
regulations, fail. However, it can also be argued that it works the other way around. This logic
comes back in the example of the study of Beamish and Lupton (2009). Beamish and Lupton
(2009) argued that when a conflict arises as a result of a cross-cultural difference,
management should refer to a set of previously agreed-upon rules. Here, informal constraints
fail and management refers back to the formal constraints. It is also important to note that
Barkema and Vermeulen‟s (1995) study points out that not all cultural aspects are a cause for
IJV instability. Hence, not all internal institutions which are conflicting can result in
instability in IJVs.
Difference in characteristics of the parents
This cause for IJV instability can also be explained by means of the difference of internal
institutions. In the same way this can cause interpartner conflict, because the parents have the
last word when it comes to the IJV and not management of the IJV itself (Koppenol, 2009).
As Reuer et al., (2002) point out, prior IJV experience with a different partner does not
influence IJV instability. However, prior IJV experience with the same partner does influence
IJV stability positively. This can be explained by means of Gaur & Lu‟s (2002) categorization
of hazards. As time passes, unfamiliarity and relational hazards decrease, which in turn leads
to more stable IJV. Partners will become more familiar with each other‟s routines and more
importantly their internal institutions. Hence, the age of the IJV has a moderating effect on the
relation between the differences in internal institutions and differences in characteristics of the
parents.
Koen van den Oever - 545493
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External environment
This cause for IJV instability is explained by means of Scott‟s (1995) „regulative pillar‟.
Recall, this pillar captures the rules and laws that exist to ensure stability and order in
societies. These aspects are the formal institutions that constrain the strategic choices of
management of a firm. Normally, these institutions exist to ensure stability in society, but the
opposite effect can also be the case. When regulative institutions change, an IJV is not the
optimal organization of the firm to adapt to those changes due to divided ownership and
management in the IJV (Anderson & Gatignon, 1986). Anderson and Gatignon (1986) argue
that the greater the combination of risk of institutional change and transaction-specific assets,
the higher the appropriate degree of control.
The effect of regulative institutional changes does not always lead to a change in the cultural
environment. This can be concluded from an anecdotal case presented by Nakamura (2005):
“Japan chose the policies emphasizing developing technology-based manufacturing
industries without foreign direct investment until the 1970s, which went together with
relatively weak protection of intellectual property rights. Indeed Japan did receive relatively
little (inward) foreign direct investment throughout the 1950s through the 1990s. Japan
reversed their official policy in this regard following the burst of its financial bubble in 1990.
It now argues it welcomes inward foreign direct investment. Despite such a reversal of the
official policy the general business culture and policy environment in Japan which
discouraged foreign direct investment for many decades does not appear to have changed
much yet.”(Nakamura, 1005, p. 473)
Hence, it can be argued that regulative changes can be mitigated due to the normative aspects
in the external environment. The effect that the external environment can have on IJV
instability is thus moderated by the normative institutions of that specific field.
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Chapter 5 Conclusions and discussion
In this chapter, conclusions are drawn based on this literature review. Additionally, there is
discussion of the results and finally a number of academic and practical recommendations are
made.
5.1 Conclusion
This literature review started with the problem statement: „To what extent can the institutionbased view be used to explain instability in international joint ventures?‟. This question is yet
to be answered. The research questions proposed in chapter 1 will be answered first, in order
to formulate an answer to the problem statement.
As follows from the literature review, the conceptual background of institution-based view is
a very new theory and still has many critics. However, it can be concluded that the basis of
the theory is solid, Scott‟s (1995) „three pillars‟ are fundamental for the theory. Scott‟s (1995)
view is incorporated in Peng et al.,‟s (2009) view in this thesis and used to explore the causes
of IJV instability. Here, institutions will help and constrain companies on their quest to gain
legitimacy.
Furthermore, numerous factors were discovered which can have an effect on IJV instability.
Causes which were identified were: interpartner conflict in co-management, cross-cultural
differences, differences in characteristics of parents, control/ownership structure, learning and
bargaining power, the external environment and the IJV‟s performance.
Institutions have proven to be quite fundamental for the problems that cause IJV instability.
Especially because instability is not a static phenomenon, rather it is a dynamic process. The
institution-based view takes the histories of the firms and the social context into account and
is thus a dynamic theory. Furthermore, differences in internal institutions proved to be
fundamental for the causes for IJV instability. These differences diminish as time passes.
Besides that, it was found that normative institutions moderate the effect of the external
environment on IJV instability.
The extent of explanatory power can be shown by means of figure 5.1, which was already
brought up in chapter 4. This framework shows how the institution-based view and IJV
instability relate with each other. Although the institution-based view can explain the causes
Koen van den Oever - 545493
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Age of the IJV
Difference in
internal
institutions
Interpartner conflict
in co-management
Cross-cultural
differences
Difference in
characteristics of
parents
International Joint
Venture instability
Normative Institutions
External
Environment
Figure 5.1 The effect of institutions on IJV instability
of IJV instability to some extent, other theories such as the static transaction cost point of
view can explain these causes from a different perspective. In conclusion, the institutionbased view helps to explain causes of IJV instability in a way that neither transaction cost
point of view nor the resource-based view can. By adding this institution-based view to the
already well-established economic ones, a more complete understanding of IJV instability
emerges. This results in neither an overly sociologic, nor an overly economic explanation of
IJV instability.
5.2 Limitations
Being a literature review, this thesis depends on the available literature. It is possible that
some important articles are not incorporated into this thesis, because they were not found with
the keywords used. This risk is however greatly reduced by using citation analysis, because
by means of this tool, the most important articles and criticisms against it were found.
Second, an assumption made in this thesis is that instability is regarded the same as
survivability. This is not necessarily the case and needs to be validated. I did not find much
contradiction in the literature, the only criticism I found is also incorporated in the thesis.
Also, developing countries are regarded all the same in this thesis. However, it could be the
case that there are differences between these countries regarding causes of IJV instability.
Koen van den Oever - 545493
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5.4 Academic and practical recommendations
Further research could study the exact differences between survivability and stability of an
IJV. It is not appropriate to ignore the differences in these definitions, as much research in this
field does nowadays. Further research could also analyze the differences between culture and
institutions more thoroughly. Besides that, the institution-based view should be discussed and
validated further. Moreover, research should investigate whether some causes of IJV
instability can be different for different countries. In this thesis they are all generalized as
developing countries. As already said in the conclusion, the institution-based view can explain
the causes of IJV instability in quite an extent. Further research could validate the conceptual
model brought up in this thesis and should be empirically tested.
Furthermore, management should carefully look into the risks of an IJV when choosing an
entry mode. As this thesis argues, problems that can cause IJV instability are deeply rooted in
management of the IJV and parent firms of the IJV. Solutions will be hard to uncover, as
these institutions are so deeply rooted.
Koen van den Oever - 545493
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