Risk Perception and Post-formation Governance in International Joint Ventures: The
Perspective of the Foreign Partner
Autoria: Linda Hsieh, Suzana Braga Rodrigues, John Child
Abstract: This paper draws on a risk analysis framework in order to develop a systematic
understanding of the risks perceived by partners, and to investigate the implications of risk
perception for the configuration of control in the post-formation governance of international
joint ventures. The key variables in this framework consist of six situational factors which are
considered as potential antecedents of perceived risk: conflict, opportunism, cultural
difference, dependence, partner fit, and ownership share; partner’s perception of risk; and
post-formation governance as a set of outcome variables. The framework is tested using a
sample of international joint ventures located in Taiwan. The findings show that conflicts
between partners, opportunistic behavior by the local partner, cultural differences, and
perceived partner misfit are related to foreign partners’ risk perceptions. This study suggests
that when foreign partners face likely performance and partnership risks after an IJV is
established, they tend to resort to tighter post-formation governance measures in order to
increase or maintain their confidence in their joint ventures. It suggests that situational
factors, such as conflict, cultural differences, opportunism and partner misfit create conditions
that signal something is going wrong may affect perception of risk in IJVs. Second, the study
indicates the relevance of looking into the relational and structuring conditions of an alliance
and their consequential effects on risk perception and on the IJV management.
1. Introduction
International joint ventures (IJVs) continue to be an important means for firms to achieve
their strategic goals in today’s international business environment. However, despite the
frequent use of IJVs, they often have a limited life. Some firms may undertake IJVs on a ‘real
options’ basis as a hedge against risk in conditions of uncertainty (Seth and Chi, 2005).
Although an IJV may be an alternative to assuming the full risk of investing in a foreign
market, it is at the same time an intrinsically risk-taking option. Joint venture partners need to
rely upon one another as agents for the fulfillment of their strategic objectives when each
needs capabilities that the other can supply. This poses an intrinsic risk if one partner is
deficient in its resources, contextual knowledge, or access to markets and local institutions
(Child, et al., 2005). The value of an IJV can also be downgraded not only if partners are
incompetent or have no intention to meet the other’s financial and other business
expectations, but also when there is the danger of one partner expropriating key resources
from the other (Luo, 2005). Partners in IJVs may incur different types of risk, most of which
stem from the inability or unwillingness to pursue agreed goals and from difficulties in the
relationships between the partners.
With a few exceptions (Das and Teng, 2001b; Child and Rodrigues, 2004) most studies
have focused on risk assessment at the IJV formation stage. The way in which partners
evaluate risks and introduce corrective measures to reduce them once the IJV is formed
remains relatively unexplored (Inkpen and Currall, 1998; Reuer et al., 2002; Brouthers and
Bamossy, 2006). The present study aims to extend the understanding of risk perception to the
IJV’s post-formation context by adopting a risk-based view approach to testing a model in
which the adoption of ex post governance mechanisms depends on the perception of risks and
conditions that mitigate or exacerbate it, such as the quality of interpartner relationships.
Moreover, our knowledge of IJVs’ post-formation dynamics and control is still limited to a
small number of studies. Most of them are either conceptual or case-based (e.g. Doz, 1996;
Ariño and de la Torre, 1998; Reuer et al., 2002; Brouthers and Bamossy, 2006).
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The fact that many IJVs suffer from management problems and poor performance
(Nippa et al., 2007) indicates the need for further research on effective cross-border
monitoring and governance practices. Post-formation governance decisions are perceived to
be crucial for ensuring that partners’ intentions will be met. Studies have found that IJVs often
fail because partner firms do not implement ‘post-formation processes’ by which partners can
affect IJV performance through adjusting and adapting governance and control (Brouthers and
Bamossy, 2006). Similarly, Doz (1996) suggests that the outcomes of collaborations are not
solely determined by initial formation conditions, but also by partners’ adaptive capability to
accommodate and manage changing conditions in the evolution of IJVs.
In the study to be presented, governance is defined as ‘the process of control over and
within the firm (that is, the IJV) that aims to reduce risk to its owners and to ensure that its
activities bring a stream of acceptable returns to those owners in the long term’ (Child and
Rodrigues, 2004, p.90). IJV governance has been studied from different perspectives (e.g.,
transaction cost, trust, institutional and behavioral approaches), but a risk-based view of it is
yet to be fully developed. It is clear from previous studies on strategic alliance that transaction
cost theory contributes important insights into the governance forms available for alliance
partners to adopt. Nevertheless, it mainly deals with considerations of cost and efficiency and
does not suggest methods for maintaining IJVs once they are formed.
This paper proceeds as follows. Section 2 develops a theoretical model and hypotheses
on the relations between risk perception in IJVs and its antecedents and, secondly, on risk
perception and post-formation governance. Section 3 discusses the methodology employed to
test the proposed model and constituent hypotheses. The results and findings are presented in
Section 4. Section 5 offers a discussion and conclusion.
2. Theoretical Model and Hypotheses
2.1 Risk conceptualization and perception in international joint ventures
Risk is defined here as the perception of potential instabilities and vulnerabilities faced
by companies which impose limitations, restrictions, or even losses in international business
(Ahmed et al., 2002). Previous studies (e.g. Miller, 1992; Child and Rodrigues, 2004) suggest
various sources of risk facing multinational companies, such as general environmental
uncertainty, institutional risk, industry/market risk, resource deficiency risk, and agency risk.
The IJV literature suggests that resource deficiency and other asymmetries between different
firms can explain why partners decide to cooperate through forming an IJV. Agency theory
nevertheless suggests that these same reasons may encourage partners to cheat and use the
partnership opportunistically to advance their interests (Child and Rodrigues 2004).
Risk perception is defined as a “decision maker’s assessment of the risk inherent in a
situation” (Sitkin and Pablo, 1992, p. 12). The assessment of risk reflects the degree to which
an individual perceives a particular situation as negative or as a threat. Risk in IJVs may occur
where one partner experiences potentially negative outcomes from the untrustworthy behavior
of the other partner (Inkpen and Currall, 1998). In general, risk in inter-firm collaborations can
be one of into two types (Das and Teng, 1999; 2001a). There is relational risk – the likelihood
that partner firms may lack commitment to their partnership, and performance risk – the
likelihood the performance of the alliance will decline in the future. Building on Das and
Teng’s work (2001a, 2001b), we consider four dimensions of risk perception which have
implications for decision-making in the post-formation control of IJVs. These comprise: 1) the
perception that the JV performance could decline in the foreseeable future; 2) the perception
that the relationship between a foreign partner and its local partner could deteriorate in the
foreseeable future; 3) the perception that a partner could be unreliable or unwilling to commit
itself to the collaborative venture; and 4) the perception that a partner could not be trusted.
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While recognizing the relevance of external sources of risk for the decision-making of
control measures, the main focus of this paper is on internal sources of risks of a relational or
structural nature. It is assumed that internal sources of risks can be more easily addressed by
companies through exercising influence or control over IJV operations, while external ones,
such as those concerning the contextual legal system and the degree of competition in the
sector, can only be addressed through political and institutional action. The relational and
structural conditions under consideration include conflict, opportunism, cultural distance,
dependence, partner fit, and ownership share.
2.2 Relational conditions
2.2.1 Conflict
Interpartner conflict is a vital concern for international joint ventures because frequent
disagreement between partners may indicate a breakdown in their cooperation. It also points
to the likely future of the relationship. Demirbag and Hirza (2000) suggest that inter-firm
conflicts may include issues related to strategic control, tactical control, division of benefits,
and component sourcing. Dysfunctional or irresolvable conflicts between partners would tend
to destabilize the JV relationship (Morris and Cadogan, 2001). The level of interpartner
conflict has also been found to be negatively associated with interpartner trust (Zaheer et al.,
1998) and IJV performance (Fey and Beamish, 2000). When interpartner conflicts intensify, it
can be difficult to cultivate mutual trust as well as further commitment (Child et al., 2005).
Moreover, interpartner conflict may affect IJV performance by preventing the IJV from being
able to achieve much by obstructing decision-making (Killing, 1983). Therefore, in the light
of these considerations, it is reasonable to assume that conflict will contribute positively to
partners’ perception of risk.
Hypothesis 1. The more frequent the conflicts between IJV partners, the greater the partner’s
perception of risk.
2.2.2 Opportunism
In IJVs, partners are agents for each other and each partner has to fulfill its role in the
partnership by accomplishing the tasks that have been agreed in the JV contract. Agency theory
assumes that agents cannot necessarily be trusted (Eisenhardt, 1989). An international joint
venture may involve two or more agents who are guided by utility maximization. Moral hazard
and adverse selection are major post-contractual opportunism problems that can occur in
alliances. Opportunism is defined as ‘self-interest seeking with guile’ (Williamson, 1985), which
involves a partner’s engaging in opportunistic behavior and is manifested in such acts as
withholding critical information, misrepresenting facts, shirking obligations, failing to keep
promises, or taking advantage of its partner with little regard for ethics (Wathne and Heide,
2000). For example, one partner might claim to have certain abilities or resources, but the other
partner might not be able to verify this in advance. Once the joint venture starts to operate, the
moral hazard and adverse selection problems will be discovered eventually and they in turn may
increase the likelihood of renegotiation as well as the transaction cost of limiting self-serving
behaviour through monitoring, safeguards, etc. (Reuer and Ariño, 2002; Reuer et al., 2002).
The belief that a partner is engaging in opportunistic behavior will generate ill will, lead
to reduced trust and hinder the development of commitment (Child and Rodrigues 2004).
Moreover, some studies (e.g. Parkhe, 1993; Judge and Dooley, 2006) suggest that the
perception that a partner is behaving opportunistically can degrade the alliance’s performance.
If a partner perceives the other as behaving opportunistically in terms of supplying a
substandard product or service, then the JV’s performance is unlikely to optimize. Thus:
Hypothesis 2. The greater the opportunism, the greater the partners’ perception of risk.
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2.2.3 Cultural Distance
Differences in the national cultures of partners have significant implications for the
viability of partnerships and performance. Cultural clashes can lead to poor performance and
a deterioration of relationships (Lane and Beamish, 1990). Previous studies suggest that
cultural differences tend to influence not only costs due to issues of managerial complexity
but also partners’ perceived opportunities, threats and objectives (Barkema and Vermeulen,
1997; Fey and Beamish, 2001). Cultural difference/distance has been found to be negatively
related to the stability and longevity of IJVs (Barkema and Vermeulen, 1997; Hennart and
Zeng, 2002). Different views and assumptions embedded in national culture tend to be
reflected in different psychological rules, leading IJV partners to think, perceive and act
differently in identical situations, which in turn may cause interaction problems that adversely
affect IJV performance (Hennart and Zeng, 2002). For example, one partner may favor quick
results, while the other is long-term oriented and prefers to build up the relationship with its
partner. Such differences are likely to raise tensions over management and difficulties in
coordination and to increase the chance of an early termination of the IJV. Accordingly,
cultural differences can negatively affect the fostering of greater trust and commitment.
Hence:
Hypothesis 3. The greater the perceived cultural differences between IJV partners, the greater
the partner’s perception of risk.
2.3 Structural conditions
2.3.1 Partner Fit
When selecting potential partners to form international joint ventures, firms usually consider
both task-related criteria such as resources and skills, and partner-related criteria such as size,
objectives, and operating policies (Geringer, 1988). Interpartner fit concerns the extent to
which partner firms can act co-operatively and realize anticipated synergies from the joint
venture (Morris and Cadogan, 2001). Some studies suggest that assessing partner fit is crucial
to ensuring successful IJV performance (e.g. Yan and Duan, 2003) because achieving
compatibility between IJV partners improves transaction efficiency through reducing costs
associated with managing the IJV. Despite careful planning and assessment during the
formation stage, preliminary assessments of factors important to fit may turn out to be
misjudged after the IJV begins to operate. This can be caused by one partner’s misconception
of the value added by the technology or other resources brought in by another partner,
misinformation about the partner’s reputation and the partner’s hidden competitive objectives
(Hamel, 1991; Muralidharan and Hamilton, 1999). Consequently, this ‘perceived initial
misfit’ or changes in the initial conditions of cooperation may raise concern about possible
poor performance if no action is taken to address the misfit (Doz, 1996). Hence, it is expected
that:
Hypothesis 4. The greater the extent of misfit between IJV partners perceived, the greater the
partners’ perception of risk.
2.3.2 Dependence
Dependence is often defined as a participant’s need to maintain the relationship with its
partner in order to achieve its objectives (e.g. Geyskens et al., 1999). In general, foreign IJV
partners depend on local partners for local market knowledge and networks, whereas local
partners depend on foreign partners for technology and capital (Inkpen and Beamish, 1997).
Resource-based bargaining power theory suggests that interdependence between partners can
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be seen as one of the key structural elements determining the level of commitment and trust in
a relationship (Kumar et al., 1995). When both partners are mutually and highly dependent on
each other for resources and services to accomplish their strategic goals, with both having
much to lose, partners are less likely to engage in opportunistic behavior (Provan and Skinner
1989). Thus, a reciprocal dependent partnership may encourage trust and commitment,
leading to a more stable relationship than that which comes from an asymmetrically
dependent relationship (Buckley and Casson, 1988).
Resource dependency theory suggests that organizations are ‘coalitions of varying
interests’ with incompatible preferences and goals (Pfeffer and Salancik, 2003). According to
this perspective, a negative relationship between dependence and performance would be
expected in a situation where a less dependent (indicating more powerful) partner tries to
maximize its own benefits by manipulating more favorable terms for itself without having
regard for the interests of the less powerful partner (Duffy and Fearne, 2004). Moreover, there
could be a situation in which failure of one partner to provide the resources or services
required by the JV can be consequential for the achievement of their objectives. Hence:
Hypothesis 5. The more dependent the IJV partner is, relative to the other partner, the higher
its perception of risk will be.
2.3.3 Ownership share
Previous research on IJV ownership share indicates that the size of equity held by a
partner reflects the overall control which it holds in the IJV, in particular, control over
strategic decisions (Child, 2002). There has been considerable debate about the relative merits
of dominant versus equal share ownership in IJVs. It is argued that when both partners put an
equal investment into an IJV, their commitment to the IJV is maximized, which in turn may
bring benefits of higher levels of trust and knowledge acquisition and also provide mutual
forbearance and stability (Mjoen and Tallman, 1997). By contrast, a dominant ownership
structure may make decision-making in IJV less time-consuming (Geringer and Herbert,
1989). In host countries where the governance system may not have provisions to guarantee
minority rights, securing majority ownership during the IJV’s formation stage is a way in
most cases to guarantee control (Killing 1983). A higher level of foreign equity ownership
allows the foreign partner to monitor its local partner through appointing board members and
senior executives, which potentially can enhance IJV performance (Mjoen and Tallman,
1997). Moreover, according to Borys and Jemison (1989), when there is an imbalanced in the
equity ownership of an IJV, especially in a situation where government policies in the host
country do not protect minority shareholders, agency risk between partners is more likely to
arise and cooperation and trust are more difficult to develop. Thus, it is expected that:
Hypothesis 6. The lower the foreign partner’s ownership share, the higher its perception of
risk.
It is generally assumed that risk is ‘subject to control’. For any firm to achieve its
strategic objectives, risks have to be controlled by devising strategic responses to counter the
perceived risks or manage them to an acceptable level. The six hypotheses discussed above
lead to the question of how risk perception is likely to influence post-formation governance,
which includes various forms of control. The next section discusses how perceived risks may
affect governance decisions.
2.4 Risk management (risk perception and post-formation governance)
Risk management is a key component of winning strategies for any enterprise, including
5
international joint ventures. Managers tend to address any perceived intolerable risk in order
to avoid failures. When a firm enters a foreign country, one of its first challenges is to deal
with the host country’s unfamiliar economic, institutional and cultural environment. Previous
work has investigated how risks affect multinational firms’ strategic choices of entry mode in
foreign markets (Brouthers, 1995; Das and Teng, 2001a; Ahmed et al., 2002). Ahmed et al.
(2002) suggest that when firms perceive a moderate level of risk in an international market,
they tend to choose joint venture as a control mode because this mode of entry represents a
low-cost strategy as well as lower resource commitments. Nevertheless, instead of
establishing a fully-owned subsidiary, collaborating with a local firm can expose a
multinational company to particular uncertainties associated with partners’ behavior (Delerue,
2004; 2005). To safeguard against their partners’ possible opportunistic behavior, alliance
members need to establish, monitor, enforce and revise the governance arrangements as their
alliances proceed.
In inter-firm collaboration, the aim of governance is to realize the potential of
partnership. In essence, it seeks to control the risks perceived by the focal firm (Nooteboom,
2004). The concept of control has been categorized in various ways and these include an
assessment of complementary and interdependent dimensions such as the degree and focus of
control and mechanisms of control (Geringer and Hebert, 1989). Based on previous studies,
control is usually seen as a set of formal and informal influences exercised by partners (Yan,
2000). Control mechanisms, including personal, bureaucratic and normative controls
(Rudman, 2006), are often utilized by IJV partners to govern and manage any contingencies
that may arise. Das and Teng (2001b) suggest that perceived risks may be mitigated through
trust and/or control. They claim that performance risk can be minimized through competence
trust, output control, and social control, whereas relational risk can be reduced through
goodwill, trust, behavior control, and social control. Likewise, Child and Rodrigues (2004)
suggest that the nature and sources of risk have implications for control choices made by the
foreign partner in an IJV. Thus partners can opt for a direct personal mode of control when
the lack of inter-partner trust is serious enough to jeopardize the alliance performance.
Das and Rahman (2001; 2002) suggest a range of ex post governance mechanisms to
deal with IJV post-formation dynamics as well as to detect partners’ misbehavior. Examples
of deterrence mechanisms include monitoring, establishing detailed and specific guidelines
about reporting, and training. They argue that these operational deterrence mechanisms have
to be in effect on a continuing basis to handle any situation that may arise. Moreover, due to
uncertainty about the contingencies which may arise as the JV collaboration proceeds, ‘ex
ante’ measures of management control are seldom complete and therefore need to be
accompanied by ‘ex post’ adaptation. Some scholars (e.g., Reuer and Ariño, 2002; Reuer et
al., 2002; Brouthers and Bamossy, 2006) advocate that partner firms should implement ‘postformation processes’ by which partners can improve IJV performance through adjusting and
adapting governance and management. Reuer et al. (2002) investigate three types of ex-post
governance changes in strategic alliances, namely the introduction or formalization of
monitoring mechanisms, contract renegotiation, and board or committee changes.
Building on the above, this paper focuses on four types of post-formation control
mechanism, namely 1) renegotiation; 2) monitoring reports; 3) personal supervision; and 4)
education and/or normative control. The last item focuses on creating positive attitudes and
motivations, shared values, and a common corporate culture among partners (Das and Teng,
2001b). The argument is that the adoption of governance practices (e.g. adaptation, education,
personal supervision and monitoring through reports) is crucial to limit the perceived sources
of internal risk attached to a partner’s investment in an IJV. The above discussion leads us to
the following hypothesis:
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Hypothesis 7. The higher the level of risk perceived by partners, the greater the extent that
post-formation control mechanisms are applied by those partners.
Figure 1 depicts the theoretical model to be tested, which contains the above hypotheses
reflecting the issues associated with IJV post-formation management. This model embodies a
risk-based analysis of post-formation IJV governance, which takes account of how situational
conditions contribute to a partners’ risk perception as well as how IJV managers deal with
perceived risks.
[Figure 1 here]
3. Methodology
3.1 Sample and data collection
This study examines international joint ventures located in Taiwan. Foreign partners
investing in Taiwan come mainly from the USA, Europe, and Japan. Since there is no publicly
available database of international joint ventures located in Taiwan, a list of potential
companies was generated from two sources: 1) announcements between 1980 and 2003 in
two major Taiwanese financial newspapers, the Commercial Times and the Economic Daily
News; and 2) the “Directory of Foreign Investment in Taiwan”, published by the Taiwanese
Ministry of Economic Affairs. In order to test the research hypotheses, the sample was
confined to those companies which met the following criteria:
1. The IJV was formed between 1983 and 2003.
2. The IJV was established in Taiwan by two or more partners and at least one of the
partners is from a country outside Taiwan.
3. The foreign partner should have held more than a 25% ownership in the IJV.
4. The IJV must have at least one or more expatriates sent by its foreign partner.
The fourth sampling criterion was chosen because senior-level expatriates sent by foreign
parent firms will usually sit on the board to oversee the IJV’s business affairs. Therefore, it is
more likely that they have better knowledge of IJV post formation management than the
personnel in their parent companies. Through the targeted reduction of the initial database, a
final list of 105 IJVs was derived for this study.
The senior foreign expatriate of each IJV was contacted by telephone to ascertain their
willingness to complete a questionnaire. Most foreign expatriates were top executives holding
positions such as president, vice president, general manager, and managing director. These
informants were chosen because of their particular knowledge and experience of the
phenomena under study (Simonin, 1997). Despite the problems inherent in single-respondent
survey research, these expatriates were probably the most qualified people to report accurate
information on their interactions with local partner firms. Of the 105 IJVs, 71 provided usable
questionnaires, which represents 67.6% of the original sample. The main types of industry
covered in this study include electronics and miscellaneous technology, industrial and
electrical equipment, chemicals, consumer goods, food and beverages and financial services.
Forty-eight out of seventy-one IJVs are manufacturing-based.
Since all the measures were collected in the same survey instrument answered by a
single respondent, common method bias may be a problem (Scott and Bruce, 1994; Simonin,
1997). To examine whether a significant amount of common method variance exists in the
data, Harman’s single-factor test (Harman, 1967, Podsakoff and Organ, 1986) was applied.
Principal component factor analysis confirmed that the measures did not load on one factor,
and the largest factor only accounts for 30.6% of the variance in the data. Therefore, it
appears that our dataset does not suffer from substantial common method bias.
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3.2 Questionnaire design
Following an extensive review of literature, a wide range of variables which could
contribute to partners’ perceived risks were identified and included in a preliminary
questionnaire. The questionnaire was finalized after pretesting through two personal
interviews with the president and vice-president respectively of two IJV firms in Taiwan and
three senior managers from the UK who had had considerable experience of IJV
collaboration. Because most IJV foreign partners were from Japan, the final English-version
questionnaire was also translated into Japanese by a Japanese MBA student in the University
of Birmingham Business School. Although the Japanese version was not back translated from
Japanese to English, the translated questionnaire was reviewed by his two course mates whose
native language is also Japanese.
3.2.1 Measurement
This study utilized five-point Likert scales, designed to assess the domains of situational
conditions, risk perception, and post-formation governance. For most of the conditional
factors which are hypothesized as contributing to perceived risks, some pre-existing measures
were available since they are frequently used in the IJV literature. Some modifications in
wording were necessary to ensure that the question gauged what it was intended to measure.
Some additional items were also added to reflect the full picture of each variable construct.
No appropriate measures were available for partner’s risk perception, and post-formation
control mechanisms. Therefore, individual items corresponding to the various facets of each
variable were extracted from the existing literature to create a new measurement for each
variable. For instance, the variable of risk perception includes trust, commitment and
performance and relational risk dimensions. Post-formation governance was assessed by the
extent that the foreign IJV partner had renegotiated terms of the contract, and introduced
education or training, monitoring reports and personal supervision. All Cronbach Alpha
coefficients are above the recommended reliability value of 0.70 (Pallant, 2001), indicating a
high degree of internal consistency.1
Lastly, IJV size and age are often included as control variables in the IJV research, as
they are known to affect IJV partners’ perception of host country and the relationship with
their partners. Through repeated transactions, the longer the IJVs last, the more proficient the
partners become in dealing with relational or performance related issues. Compared to small
IJVs, larger IJVs generally require IJV partners commit more resources. The fact that more
resources are at stake implies that IJV partners are less likely to behave opportunistically
because of the strong mutual hostage situation. IJV size was measured as the logarithm of the
number of employees. IJV age was measured as the number of years in operation.
4. Results
To examine the joint effects of independent variables on the outcome variables, we used
path analysis by which the inter-relationships among all the variables were taken into account
to find the relative strength of predictor variables on post-formation governance. The AMOS
5.0 program was utilized to test the hypothesized relationships depicted in Figure 1. This type
of path analysis software is particular useful here because it allows for several hypothesized
relationships to be tested simultaneously and provides an indication of the fit between the
hypothesized model and the actual data. Maximum likelihood estimation was used. The
research framework of this study was assessed by examining the goodness-of-fit statistics for
the model as a whole and statistical significance of estimated path coefficients.
Most commonly-used fit statistics include Chi-Square, Chi-Square to Degrees of
Freedom ratio (CMIN/DF), Comparative Fit Index (CFI), Incremental Fit Index (IFI), TuckerLewis Index (TLI) and Root Mean Square of Approximation (RMSEA) (Byrne, 2001;
8
Ullman, 2001). Among the above fit indices, the CFI (a revised Normed Fit Index (NFI) that
adjusts for sample size) and RMSEA would offer a better idea of goodness-of-fit when the
sample size is small (Fan et al., 1999; Byrne, 2001; Dhanaraj et al., 2004). The generated CFI
was greater than the conventional threshold of .90 (Byrne, 2001). The RMSEA was below .05,
and was not significant, indicating an acceptable fit between model specification and the
observed data (p=0.606). Overall, the selected goodness-of-fit statistics indicate the
hypothesized model fits the data quite well.
Hypothesis 1 postulates a positive association between conflict and risk perception. The
significant parameter estimate (β=.365, p<0.01) indicated support for Hypothesis 1.
Hypothesis 2 assumes a positive relation between opportunism and risk perception. The
significant parameter estimate (β=.245, p<0.01) indicated support for Hypothesis 2.
Hypothesis 3 positively relates cultural differences and partner’s perception of risk. The
significant parameter estimate (β=.206, p<0.05) indicated support for Hypothesis 3.
Hypothesis 4 proposes that the better the fit between IJV partners, the less the partners’
perception of risk. The significant parameter estimate (β= -.192, p<0.05) indicated support for
Hypothesis 4. No support was found for Hypothesis 5, indicated by a non-significant
parameter estimate between dependence and risk perception (β= -.115, p>0.05). Similarly, no
support was found for Hypothesis 6, indicated by a non-significant parameter estimate
between ownership share and partner’s perception of risk (β= -.110, p>0.05). Hypothesis 7
proposes that the higher the level of risk perceived by partners, the greater the extent of postformation governance measures used by partners. The significant parameter estimate (β=.703,
p<0.01) indicated support for Hypothesis 7.
Taken as a whole, the results indicate that 5 out of 7 hypothesized relationships specified
in the proposed model were supported and in the predicted direction at either the 0.01 or 0.05
level. The R2 value for prediction of risk perception was .725 and for post-formation
governance it was .494. The results also show a clear distinction between relational and
structural conditions because relational conditions seem to be better predictors of partner’s
perception of risk. In this sample, conflict was the most influential predictor in explaining
partner’s perceived risk, followed by opportunism, cultural differences and partner fit.
As to control variables, this study utilized regression analysis to control IJV’s size and
age, given that structural equation modeling (SEM) puts a high demand on sample size in
relation to the number of parameters estimated. We ran a standard regression by regressing
risk perception on the structural and relational conditions and IJV size and age. Both IJV size
(β= -.090, p>0.10) and age (β=.047, p>0.10) were found to be non-significant. Additional
research is required to further clarify the relationship between risk perception, IJV size and
age.
To examine the research model (Figure 1) and further verify its hypotheses, we used the
alternative models strategy suggested by Jöreskog (1993). This procedure requires the
specification of alternative/competing models, and then testing the alternative models against
the proposed model. The first alternative model included only the direct effects of relational
and structural conditions on post formation governance. The second, noting that conflict,
opportunism, cultural difference, and partner fit were all significantly correlated with postformation governance at the 0.01 level, drew another additional four direct paths from
relational condition variables and partner fit to post-formation governance. Neither alternative
provided a superior solution to the hypothesized model.2
Overall, the generated results indicate that the postulated situational conditions affect
post-formation governance decision mainly through their effects on risk perception. That is,
the managerial perceptions of risk significantly mediate the relation between situational
conditions and post-formation governance. The findings support the importance of taking
account of risk perception in the IJV post-formation period.
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5. Discussion
The findings of this study suggest that foreign partners’ perception of risk (which may be
caused by conflict, local partner’s opportunistic behavior, cultural distance and perceived
partner misfit) can be dealt with by means of renegotiation of contract terms, board
composition and key personnel appointments, personal on-the-spot checking, regular
evaluation against agreed target (monitor report), and creating positive attitudes, motivation,
and shared value via education and training. Initial IJV contracts often are incomplete and are
developed further only after IJVs have begun to operate. Thus initial governance
misalignment can prompt partner firms to alter the contract to better fit their needs, especially
when a partner firm has made significant transaction-specific investments. Moreover, IJV
partners can deal with post formation dynamics by attending to the board committee
overseeing the ventures or the key personnel appointments. These people are often seen as
gatekeepers whose main function is to prevent corporate misconduct, to ensure that IJV goals
are being met as planned and to correct any significant deviations. When there is the presence
of frustration, conflict and distrust among these people, changing or replacement of new
people can be seen as aiming to restore the harmony among members of top management,
which in turn may help regain trust and promote partners’ commitment to the IJV and to each
other. Routine monitoring allows IJV partners to compare actual outcomes with pre-specified
objectives or intended outcomes and may help one partner to detect the other partner’s
suspicious activities and to better shield itself from the risks associated with the partner’s
misbehavior. Such monitoring can also alert IJV partners to performance problems as they
arise so they may act quickly to mitigate the negative impact before it rises to precarious
levels. As to education and training, it not only facilitates knowledge sharing but also helps
partners to align interests and to overcome cultural related barriers to IJV success, such as
bridging the gap in perception and understanding of quality issues between the focal firm and
its partner. In addition, the resulting shared norms and values can in turn foster trust building
and respect between IJV partners.
The present study advances our knowledge in a number of ways. The theoretical model it
develops and tests is more extensive than that adopted in most previous research in three
respects: it identifies different dimensions of perceived risk; it includes post-formation
governance; and it posits perceived risks as mediating between JV situational conditions and
post-formation governance. The adoption of a more extensive model has in turn permitted the
study to make a number of more specific contributions. First, the present study is the first to
have empirically examined the relationship between risk perception and post-formation
management in IJVs. This study shows that situational factors may affect perception of risk in
IJVs. It suggests that conflict, cultural differences, opportunism and partner misfit create
conditions that signal something is going wrong. Second, the study indicates the relevance of
looking into the relational and structuring conditions of an alliance and their consequential
effects on risk perception and on the IJV management. Compared with previous research on
the source of alliance problems (e.g. Luo and Park, 2004), the results of this paper indicate
that these are more likely to be relational rather than structural. This could be because
structural conditions have already been taken into account by partners at the formation stage,
whereas relational conditions may only emerge subsequent to IJV formation. Third, the
present study is considered more managerially relevant than previous empirical efforts in the
way that the role of risk is incorporated into the model of partners’ decision-making about the
control of an IJV. It suggests that IJV partners may try to cope with unstable and vulnerable
situations by resorting to governance mechanisms. Partners’ perceived risks have been shown
to mediate between JV situational conditions and ex-post governance measures. The findings
suggest that the partners’ perception of risk is of consequence for their decisions on their IJV’s
10
post-formation control. The implication of this study indicates that IJV partners’ ability to
detect and manage cooperation- or performance-related risks can be a decisive factor between
IJV success and failure.
In order to keep the study within manageable limits, especially with regard to
questionnaire length, the authors confined the analysis to what appear to be the most
important issues concerning risk and its management in IJVs. The limitations and findings of
this study lead naturally to several areas worthy of further research. Firstly, since learning
from a partner also provides the basis for increased bargaining power which reduces
dependence on the other, assessments of learning should be included in future research (see
Makhija and Ganesh 1997). Future studies should also consider the effects of environmental
changes, such as adoption of measures which are friendlier to foreign investment. Another
limitation is that the paper does not examine the governance mechanisms independently.
Future studies might consider unpacking the construct of post-formation governance and
trying to identify the relevance of different types of governance mechanisms to dealing in turn
with a partner’s perception of performance and partnering risk. For example, trust-building
may help mitigate risks by alleviating the fear of opportunistic behavior by partners. This
study was further limited by its small sample size of IJVs operating in only one country and
by Japanese firms constituting 70.4 percent of the sample collected. Therefore, in order to
improve the generalizability of the current study, there is a need for a replication of similar
models of IJV post-formation governance based on the risk perception concept, with larger
samples and in other countries. A further limitation of this paper is that it only focuses on the
perceptions of foreign partners. Future studies might benefit from surveying both foreign and
local partners to avoid problems of unidirectional bias, though implementation of this
approach requires a high level of access to respondents and could be very challenging.
Alternatively, case studies could be conducted to triangulate qualitative data with the
quantitative data results. In addition, the process depicted by the path in Figure 1 would be
better studied through a longitudinal research design, in order to minimize the possibility of
reverse causality among the main variables. Also since most international joint ventures start
with high strategic fit and low cultural fit, partners gradually take adaptive actions to improve
their compatibility and such actions could also more readily be explored through a
longitudinal design. Finally, future research could consider the inclusion of IJV performance
both as a potential conditioning/moderating variable and as an outcome, especially in a
longitudinal study.
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Figure 1. Model of IJV Post-Formation Management and Hypotheses
1
2
Full details of operational measurements are available from the first author.
Details of results are available from the first author.
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