EQUITYJOINTVENTURESAND THETHEORYOF

THE MULTINATIONALENTERPRISE

Paul W. Beamish*
Universityof WesternOntario
John C. Banks**
WilfridLaurierUniversity
Abstract.This paper extends the internalizationapproachto the
theoryof the multinationalenterprise(MNE)to includean expanded
role for equityjoint ventures.Using the transactioncost paradigm
of Williamson,thispaperexplainswhyjointventuresmaysometimes
be preferredover wholly owned subsidiaries.Also presentedis
empiricalworkonjoint-ventureperformancein developingcountries
whichdemonstratesthatundercertainconditionsjoint venturescan
be the optimalmodeof foreigndirectinvestment.

Joint venturesare the dominantform of businessorganizationfor multinational

enterprisesin the developing countries (Vaupel and Curhan 1973), and are
frequentlybeing used by Fortune 500 companies in the developed countries
(Janger1980; Harrigan1985). In fact, for U.S.-basedcompanies,all cooperative
arrangements(involvingsuch thingsas licencesor local shareholders)outnumber
wholly owned subsidiariesby a ratioof 4 to 1 (Contractorand Lorange1987).
MNEs often preferjoint ventures over wholly owned subsidiariesregardless
of whether or not they are requiredby a host country as a condition of entry
(Beamish 1984). Nevertheless,fairly limited considerationhas been given to
the rationalefor equityjoint venturesin the theoryof the multinationalenterprise.
While recenttheoreticalcontributionsutilizingthe internalizationapproachhave
significantlyadvancedour understandingof MNEs (Buckleyand Casson 1976;
Casson, 1979, 1982; Rugman 1979), the theory offersonly partialexplanations
of the ownershippreferencesof MNEs for other than wholly owned subsidiaries
(Davidson and McFetridge1985; Teece 1985; Thorelli 1986; Horstmannand
Markussen1986; Wells 1973). The purpose of this paper is to furtherextend
the internalizationapproachby providingan economicrationaleforjoint ventures

* PaulW. Beamishis AssistantProfessor of BusinessPolicyandInternationalBusiness

at the Universityof WesternOntario.He receivedhis Ph.D. degreein Business
AdministrationfromWestern,and was winnerof the BarryM. RichmanDissertation
Awardin International
Management fortheAcademyof Management (1986).
** John C. Banksis AssistantProfessorof BusinessPolicyand InternationalBusiness
at WilfridLaurier in Waterloo,Ontarioanda Ph.D.candidate
University in International
Businessat YorkUniversity
(Canada).
Received:November 1985; Revised:August& November 1986; Accepted:December 1986.

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2 BUSINESS
JOURNALOF INTERNATIONAL STUDIES,SUMMER1987

withinthe framework providedby the transactions

cost paradigm.1
In the next
section,themainfeaturesof internalization
theoryarereviewed.Thisis followed
by a discussionof how the theorycan be extendedto joint venturesusing
the transactions
cost paradigmdevelopedby Williamson(1975). In the final
sectionempiricalevidencesupporting someof the predictions
of thisexpanded
notionof internalization
theorywillbe examined.
THETHEORYOF INTERNALIZATION
Internalization theorywas developedto providean economicrationalefor the
existenceof MNEs.By definitionthese firmsestablishlocal operationsas a
meansof servinga foreignmarketratherthanengaging in arms-lengthtransactions
with marketintermediaries. The theorypositsthatdue to the transaction costs
which mustbe borneas a resultof conductingbusinessin imperfectmarkets
it is moreefficient(lessexpensive)for the firmto use internalstructures rather
thanmarketintermediaries to servea foreignmarket.Accordingto Williamson's
(1975) reasoningthese marketimperfections arise from two environmental
conditions:uncertaintyand a small numberof marketagents.When these
conditionscoexistwith two sets of humanfactors,opportunism and bounded
rationality, he arguesthatthe costsof writing,executingand enforcingarms-
lengthcomplexcontingent claimscontracts withmarketintermediaries aregreater
than the costs of internalizing the market.2In otherwords,a firm facinga
complex,unpredictable businessenvironment andhavingfew potentialchannel
membersto utilizewouldbe moreprofitable performing thedistributionfunction
itselfif:(i) therewasa stronglikelihoodmarketagentswouldtryto takeadvantage
of thefirm'slackof completeknowledge; and(ii) thefirmwasunableto specify
all possiblefuturetransaction contingencies.
Researchers in internationalbusinesshave been very successfulin providing
an economicrationalefortheestablishment of a MNEas a responseto imperfect
marketsutilizingtransactions costlogic(BuckleyandCasson1976;Caves1982;
Dunning1981;Hennart1982;Rugman1981;Teece 1981, 1985).In extending
thislogicto international marketstheyhavefoundit usefulto distinguish between
strategiesof verticalintegration and horizontaldiversificationsince the nature
of the marketfailuresis differentin each situation.The economicreasoning
supportingthe internalization of marketsin the case of verticalintegrationis
concernedwith the failureof marketsin intermediate goods. In the case of
horizontaldiversification the concernis withthe failureof marketsin intangible
assetsfor such thingsas management know-how,tradename or proprietory
technology.Althoughthe eleganceand comprehensiveness of transactions cost
reasoninghas providedthe internalization approachwith a powerfullogic
(Rugman1980, 1985),it is still deficientin some respectsas a generaltheory
of the MNE.In our view the majorlimitationis thatthe theoryin its current
formfocusesprimarilyon one modeof hierarchyor organization. It therefore
providesthe firm with only one fully developedsolutionto the problemof
imperfect international
markets-theestablishment of a whollyownedsubsidiary
(WOS). Yet, both conceptuallyand practically,thereare a numberof other
modeswhichfirmscan anddo adoptto dealwithimperfections in international
marketsincludinglicensing,management contracts,subcontracting,jointventures
EQUITYJOINTVENTURES 3

and consortia. Moreover, firms often employ several different modes

in addressing
simultaneously theneedsof a particular
foreignmarket(Contractor
1985;Davidsonand McFetridge1985).Thus,for the internalization approach
to be regardedas a generaltheoryof the MNE it will have to providean
economicrationalefor these other modes (Hennart1985) and specifythe
conditionsunderwhicheach would provideefficiencygainsover WOSs and
the market.The purposeof this paperis to providea rationalefor equityJVs
withintheinternalization
framework.

JOINT VENTURES AND INTERNALIZATIONTHEORY

In orderto justifythe utilizationof international JVs withinthe internalization
framework two necessaryconditionsmustbe shownto exist:the firmpossesses
a rent-yielding assetwhichwouldallowit to be competitive in a foreignmarket;
andjoint-venture arrangements are superiorto othermeansfor appropriating
rentsfromthe saleof thisassetin the foreignmarket(Teece1985).A detailed
explanation for the possessionof a sustainable competitiveadvantageregardless
of the meansemployedfor exploitingit in international marketshas already
beenprovidedby DunningandRugman(1985).Likewise, conditionswithin
the
whichJVsprovidea superiormeansof exploitingtheseassetsforfirmspursuing
international verticalintegrationhas been extensivelyconsideredby Stuckey
(1983) using the transactioncost paradigm.However,a similarlyextensive
consideration of JVs in the contextof international horizontaldiversification
strategiesis currentlylackingin the literature. Thusthe focusof thispaperwill
be on thelattercase.
FollowingTeece(1983)we wouldarguethattheattractiveness of jointventures
is a functionof boththerevenue-enhancing andcost-reducing opportunities they
providethe MNE.However,accordingto internalization in
theory its present
formulation,firmswould have a strongeconomicincentiveto alwaysavoid
joint-venture arrangements sincetheseare regardedas beinginferiorto WOSs
in allowingthe firmto maximizethe returnsavailableon it ownership-specific
advantages (Caves1982;Rugman1983;Killing1983;Poynter1985;Harrigan
1985).The valueof the foreignlocal partners' assetswouldapparently not be
sufficientin anyconceivable situationto offsetthestrategicrisksandtransactions
costsfacedby theMNEin exploiting itsownership-specificassets.Yetthissolution
to the problemof imperfectmarketsassumesthatmanagement has the ability
to organizean internalmarketand that a joint venturecannotbe structured
in sucha wayas to maintainboththebargaining andmaladaption costsinherent
in sucharrangements atacceptablelevels.Thus,in itscurrent stateof development,
internalization theoryfocusesprimarily on the situationwhereWOS andarms-
lengthtransactions arethe only alternatives availableto dealwithWilliamson's
(1975)marketdisablingfactorsof opportunism, boundedrationality, uncertainty
andsmallnumbers.3
However,we wouldsuggestthatJVs whichconformto certainpreconditions
andstructural arrangements canactuallyprovidea bettersolutionto theproblems
of opportunism, smallnumbersdilemmaanduncertainty in the faceof bounded
rationalitythan wholly owned subsidiaries. Althoughthere would be costs
4 BUSINESSSTUDIES,SUMMER1987
JOURNALOF INTERNATIONAL

associatedwith writing,executingand enforcingpricingagreementsand use

restrictionsregarding the transferof the MNE'sintangibleassetsthesewill be
more than offsetby the enhancedrevenuepotentialof its assetsas a result
of forminga JV. As well, rentscan exceed those availablethroughwholly
ownedsubsidiaries dueto thepotentialsynergistic effectsof combiningtheMNEs
assetswith those of the local partner.The followingsectionwill identifythe
conditionsunderwhichwe feel marketfailuredue to opportunism, the small
numbersdilemmaand uncertainty can be efficientlyaddressedthroughjoint-
venturearrangements. Althoughdiscussedin detailin the sectionon empirical
evidence,mostof thefollowingillustrations andexamplesof how marketfailure
canbe efficientlyaddressed aredrawnfromBeamish(1984).
Oneof themostsignificant transactionalcontingencies facedbyMNEsconsidering
a joint venturewould apparentlyarisedue to the problemof opportunism.
Yet even Williamson(1975, 1983) allows that opportunistic behavioris not
necessarilyan inevitableaspectof interfirm behavioralthoughhe suspectssuch
situationswould be uncommon.We would suggestthat in situationswhere
a joint ventureis establishedin a spiritof mutualtrustand commitmentto
its long-termcommercialsuccessopportunistic behavioris unlikelyto emerge.
Thisis similarto theconceptof mutualforbearance (BuckleyandCasson1987),
whereagentson a reciprocalbasis,deliberately passup short-term advantages.
With a foundationof trust,the partner,and particularly the MNE, wouldbe
more willingto exercisethe toleranceand perseverance necessaryto see the
jointventurethroughits difficulttimes.Problemscouldbe effectivelydealtwith
by the MNEwithoutdamagingthelong-runviabilityandefficiencyof thejoint-
venturearrangement. In these circumstances the effectivemanagementof
opportunism woulddependfarmoreon managerial perspicacity andpersistence
than companylawyersmasterminding completecontingentclaimscontracts.4
Furthermore, if these positiveattitudesare reinforcedwith supportinginter-
organizational linkagessuch as mechanismsfor the divisionof profits,joint
decision-making processesand rewardand controlsystems,the incentivesto
engagein self-seekingpreemptivebehaviorcould be minimized(Williamson
1983). Undersuch circumstances, then,opportunism would likely not obtain
as the partieswouldbe able to pursuetheirown self-interest withouta need
to resortto guile.Theycouldnegotiatea sharedperception of the relativevalue
of theirrespectivecontributions over time and establisha mutuallyacceptable
divisionof profitsin a vigorousyet open fashion(Bergand Friedman1980).
Theirattentioncould be directedtowardlong-termjoint profitmaximization
since therewould be no need to make preemptiveclaimson profitstreams.
Consequently the partnerscould take the long view for investmentpurposes
whilesimultaneously adjustingto changingmarketcircumstances in an adaptive
sequentialmanner.
A smallnumberssituationparticularly whencombinedwithopportunism would
normallyresultin serioustransactional difficulties
forthefirm(Williamson1975).
In the case of joint ventures,even if initiallythereare severallocal firmsfrom
whichto selecta suitablepartner,a smallnumbersconditioncould obtainif
the firmwishedto changethe termsof the agreementat a laterdateand seek
a new partner.Havinghad some experiencewith the MNE, the initiallocal
EQUITYJOINTVENTURES 5

partnerwill clearlyenjoycost advantages overfirmsnot selectedat the outset.

Theoptionof switchingpartners notoptimalfortheMNE.However,
is,therefore,
in the absenceof localpartneropportunism, thissmallnumberssituationcould
presentmuch less serioustransactional difficultiesthan normallymight be
expected.Moreover,by establishing thoseinter-organizational linkagesreferred
to earlier,it is possibleto managemanyof the typesof difficultiesassociated
with exchangebetweenbilateralmonopolistsregardingindividualor joint
maximization of profits(Contractor1985). Therewill be muchless incentive
to securegainsby strategicposturingand the interestsof thejoint venturecan
be promoted.Thus,undercertainconditions,the smallnumbersdilemmacan
be effectivelydealtwithin a jointventure.
The problemof uncertaintycan also be handledefficientlywithin some
international joint ventures.In the absenceof opportunism and smallnumbers
disabilitiesthereare strongincentivesfor the partiesto pool theirrespective
resources. Bydoingso it is possiblefortheMNEto economizeon theinformation
requirements of foreigninvestment (Caves1982;Beamish1984;Rugman1985).
The MNE can provide firm-specificknowledge regardingtechnology,
management and capitalmarketswhilethe local partnercan providelocation-
specificknowledgeregarding host-country markets,infrastructure and political
trends.By poolingand sharinginformation throughthe mechanismof a joint
venturethe MNE is able to reduceuncertainty at a lowerlong-termaverage
cost thanthroughpurehierarchical or marketapproaches.5 Becausethe parties
wouldhavelittleincentiveto behaveopportunistically the derivativecondition
of informationimpactedness due to uncertainty and opportunism would not
arise.Althoughboundedrationalitywould continueto be a problem,a pure
hierarchical modeof transacting wouldnot represent a superiorsolutionto this
problemalone. The low costs associatedwith opportunism, small numbers,
uncertainty andinformation impactedness injointventuresunderthe conditions
specifiedabovewouldrenderthismodeof transacting the mostefficientmeans
of servinga foreignmarket.
Theoretically, althoughtheyhaveadvantages overthemarketandwhollyowned
subsidiaries in certaincircumstances, thereare limitsto the relativeefficiency
gains providedby joint ventures.First,they can sufferfrom the same goal
distortions of hierarchies.TheMNEcanbecomebiasedtowardthemaintenance
of its initialarrangements with the joint-venturepartnerwithoutconsidering
thelong-term profitorcostimplications.However,severalapproaches to ensuring
thatprofitability goalsare not subordinated to otherconsiderations or thatthe
joint-venturemode of transactionis not uncriticallypreservedcan be taken.
Forinstance,profitability goalscanbe maintained by givingthegeneralmanager
an equitypositionin the joint venture.This providesa strongincentivefor
him to ensurethat profitsare earnedin the joint ventureitself and are not
unequallysiphonedto one partnerover the other.Mechanismscan also be
established thatpreventeitherpartnerfromhavingtotalcontroloverdistribution
or final sellingprice.6As well, management fees (usuallypaid to the MNE)
can be tied to the productivity/profitabilityof thejoint ventureand the length
of managementcontractscan be held to a relativelyshorttime period.Not
tying the joint ventureto a singlesourceof supply,particularly if it is one
6 JOURNAL OF INTERNATIONALBUSINESSSTUDIES, SUMMER 1987

of the partners,
canhelpensurethatprocurement biasesareminimized.Finally,
a consciouseffortcan be madeto ensurethat the total incomederivedfrom
thejoint ventureby each partner,even if the mechanisms for doingso differ,
are approximately equal(Contractor 1985).7Approaches to ensuringthejoint-
venturearrangement is not uncritically
maintainedincludeexplicitrecognition
by both partiesthat:a partnermay resortto guile at some pointeven if this
was absentin his behaviorat the outset;whilethe foreignpartnermay possess
the requisiteknowledgeaboutthe local economy,politicsand cultureat the
outsethe may not continueto put forththe effort8necessaryto maintainthis
knowledge;andif the absolutenumberof locallyavailablemanagersincreases,
the needfor a foreignpartnerand his abilityto supplymanagement resources
maybe reduced.
The riskof leakageof proprietary knowledgealso servesto limitthe efficiency
gainsavailablethroughjoint-venture arrangements.Leakagecan occurin one
of two majorways:a localemployeemaydecideto resignandusetheknowledge
acquiredin the joint ventureto establisha competingfirm(Type 1); or the
local partnermay decideto dissolvethe arrangement and use the knowledge
gainedthroughthe joint ventureas a basisfor continuingto servethe local
(and possiblya foreign)marketthroughhis own organization (Type2). Type
1 leakagesareespeciallyhardto preventparticularly if the employeeconcerned
recognizesthe personaltrade-offsinvolvedand is willingto live with some
limitationssuchas beingforcedto servea singlemarket.Type2 leakagesare
ofteneasierto controlbecausethe negativeconsequences for the local partner
can be quitesignificant. Piratingthe MNE'sexistingtechnologywill normally
meanthatthelocalpartnerlosesaccessto exportmarkets,ongoingtechnological
developments, trademarks, marketing skillsandpossiblyspecialized rawmaterials.
Moreoverdepending on how the originalagreement wasstructured, thispirating
of technologymight even be construedas a form of industrialespionage.
Presumably the threatof lawsuitswouldact as a disincentive. Certainlythere
is, however,a dilutionof completecontrolwith industrialespionage(Buckley
1985:46). Leakage,therefore,is a problemin joint venturesand its costsdo
serveto limittheefficiencygainsjointventuresofferovermarketsandhierarchies
(Parry1985;Rugman1985).

EMPIRICALEVIDENCE
This sectionreviewsrecentjoint venturestudiesby Beamish(1984), Wells (1983)
and Stuckey(1983) as they relateto internalization
theory.The reviewof Beamish
(1984) is the mostextensivesinceit constitutes
new empiricalevidence.It also
attemptsto incorporate
supporting evidencefromotherjoint-ventureresearchers,
includingArtisienand Buckley (1985), Schaan (1984), Killing (1983), Janger
(1980) and Tomlinson(1970) and was the sourceof manyof the previously
citedexamples.

ThePerformanceof Joint Venturesin LDCs

Data was collected by Beamish (1984) in three stages on a total of 66 joint
ventureslocatedin 27 differentLDCs. Withinthe thirdstage,particularemphasis
EQUITYJOINTVENTURES 7

was placedon 12 comparative corecases.The distinctionusedfor developed/

less developedcountrieswas 1978 per capitaGNP over/underU.S. $3,000.
Jointventuresweredefinedas shared-equity undertakings betweentwo or more
parties,each of whom held at least five percentof the equity.The research
was concernedwithjoint venturesthathadbeen formedbetweena company,
group,or individualfroma developedcountrywith a similarentityin a less
developedcountry.Whilesuchgroupscouldanddid includelocalgovernments
as partners,the focusof the researchwas on joint venturesin whichthe local
government wasnota shareholder. Noneof thecoreventures involvedgovernment
partners.Otherpartnercombinations werenot includedin the samplebecause
they were eitherless typical(i.e., two MNE partnersin an LDC) or because
thepartners mightnotsharethesameprofitmotivation(i.e.,government partners
beingmoreconcernedwithemployment thanprofitability).Also excludedfrom
the studywereone-shot,project-oriented ventures(sometimesknownas fade-
out joint ventures)and venturesin which the parentcompanyviewed its
involvementpurelyas a portfolio-likeinvestment.Althoughinterviewswere
conductedwith, and questionnaires administered to, the local partner,MNE
partner,andjoint-venture generalmanager(wherepossible)in each of these
core ventures,for the purposeof this analysisprimarilyonly MNE partner
observations arereported.Thisattemptto solicitinformation frombothpartners,
andthegeneralmanagerforeachventurerepresented a majorpointof departure
frommanypreviousworkson joint-venture performance. This was important
becauseit provideda more balancedpictureof the actualoperationof the
jointventureandincreased confidencein theresearchfindings.
The questionnaires administered in the core ventureslent themselvesto non-
parametric statisticalanalysisof data.Althoughquestionnaire findingsfromthe
12 core ventureswere emphasized,they were supplementedby interview
commentsfrom46 seniorexecutivesin the66 jointventures.
Interviews wereconductedin fivecountries-Canada, theUnitedStates,England
andtwo Caribbean nations.The 46 interviewsaveragedmorethanthreehours
in lengtheach,andwere,with five exceptions,conductedin person.The other
fiveinterviews tookplaceby telephone.
Over 100 executiveswere contactedin obtainingthe 46 interviews.A larger
originalpoolwasrequired becauseof theneedto findjointventuresthatsatisfied
methodological constraints.
Companiesagreedto participate in the researchin
approximately ninetypercentof caseswheretheinterviewer wasableto establish
that the companies'venturefit the sampledesign.Thesecore ventureswere
all betweeneitherAmerican, British,or Canadian MNEsandlocal,privatefirms.
Ten of the 12joint ventureswerelocatedin the Caribbean, withmostof these
in a single country.All of the core ventureswere manufacturers. Non-
manufacturing ventureswereexcludedbecausemixingjointventuresin a sample
wherethe scale of investmentis commonlymuch higher(mining)or lower
(distribution)couldpotentially affectthejoint-venturedecisionprocess.Thecore
ventureswere concentrated in two sectors.Therewere both high- and low-
performing venturesin each sector.Eventhoughthis requireda longersearch
forcompanies, holdingindustry andcountryconstantwasconsidered animportant
stepin reducingthe numberof rivalexplanations of joint-venture performance.
8 JOURNALOF INTERNATIONAL
BUSINESS
STUDIES,SUMMER1987

All of the joint venturesin theseindustrieswere sampled.The researchused

structuredinterviews anda self-administered Thesequestionnaires
questionnaire.
were administered with the researcherpresent,and any questionscould be
immediatelyclarified.This also permittedthe checkingof responsesto ensure
consistency withcommentsmadeearlierin theinterview.
The sampleof joint ventureswas not a randomsampleof the joint ventures
in the region.A stratifiedsampleof joint venturesbetweenforeignprivateand
localprivatefirms,primarily in one country,wasused.
For inclusionin the sample,joint ventureshad to have been in operationfor
at leastthreeyears.Becausemanyjointventuresneverget off the ground,those
firmswhichhad beenfullyoperatingbusinessesfor less thanthreeyearswere
excludedto increasethe comparability of the sample.Averagesales for the
ventureswere US $4.5 million,and all of the 12 ventureshad salesbetween
US $1.0 and $10.0 million. There was no correlationbetween sales and
performance. Fiveof theventures soldto bothindustrial
customersandconsumers;
two, to industrial customersonly;andfive,to consumersonly.Halfof thejoint
venturesexported,withno correlation betweenexportingandperformance.
Averagemarketsharefor the coreventureswas forty-twopercent,witha high
standarddeviation.Therewas no correlation betweenmarketshareandjoint-
ventureperformance. Thejoint ventureshad been formedbetween1959-1978
and had beenin operationan averageof 11.5 years.Therewas no correlation
betweenageandperformance.
None of the core ventureshad effectivemonopolypositions.Eitherlocal
manufacturing competitionexisted, or tariffs were low enough to allow
competitiveimport.The MNE held a minorityequitysharein 5 of the 12
ventures.Halfof the coreventuresexported(up to twenty-fivepercentof sales),
withno correlation betweenexportingandperformance.
Thebasisforthemeasureof successusedin thisstudywasthelong-termviability
of the joint venture.Performance of the joint ventureswas measuredby a
managerialassessmentin which only when both partnerswere satisfiedwas
the ventureconsidered successful.If one or bothpartnersweredissatisfied with
the performance, the venturewas consideredunsuccessful. This measurehad
beenpreviouslyusedin joint-venture researchby Schaan(1983). In everycase
in whichthe venturewas assessedby management as successful,both partners
were also earninga fifteenpercentor higherreturnon equity.Overall,7 of
the 12 ventureswereclassedas successful and5 as unsuccessful.
While it may be possibleto operatea joint venturefor a shortperiodwith
a dissatisfied
partner, Beamish(1984)foundthatrefusingto recognizedifferences
is ultimatelycostlyin termsof the long-termviabilityof the JV. MNEpartners
whoaresatisfied withtheirownreturns andyetignoretheirpartner'sdissatisfaction
with performance are ultimatelysowingthe seeds of destructionof the joint
venture.Localpartnerswill not tolerateunsatisfactory performance indefinitely,
particularlyif theyperceivedifferences in thereturnsearnedby theotherpartner.
Beamish(1984) observedthat when the MNE partnerhad two moresources
of income(irrespective of type) thandid the local partner,poor performance
resulted.Whentherewas a closerbalancein the numbersof sourcesof income
EQUITYJOINTVENTURES 9

for eachpartner,moresatisfactory performance was observed.Thisis generally

consistentwith Contractor's (1985:44) pointthat"insomecasesthe optimum
forthelocalpartneris to tryto disallowa royaltyorcomponent supplyagreement
altogether andnegotiateonlyon an equitysharingbasis."
If the MNEpartneris satisfiedor complacentabouthis own performance, and
thelocalpartneris not,thelocalpartnerhasnumerouswaysin whichto express
his dissatisfaction. If, for example,the local partnerloses trustin the foreign
partner(i.e., perceivesthatthe MNEpartneris operatingopportunistically), he
may move toward the formalizationor enforcementof variouscontracts
surrounding the operationsof the venture.As notedearlier,the costsof such
actionswould negatemuchof the rationale9 behindthe establishment of the
jointventurein thefirstplace.
Beamish(1984, 1985) observedthatthe characteristics of joint venturesin less
developedcountriesdifferedfromthosein developedcountries. Differenceswere
notedin stability,10 autonomy,ownership,reasonsfor creatingthe venture,and
management control.This issueof controlhas been particularly importantin
joint-venture research.Fromhis joint-venture researchin developedcountries
Killing(1983), like Kolde (1974), concludedthat one partnershouldassume
dominant controlandoperatetheventureasif it werea whollyownedsubsidiary."
Ontheotherhand,Janger(1980)foundin hisstudyofjointventures in developed
and developingcountriesthatone controlstructurecould not be identifiedas
more successfulthan the others.Tomlinson's(1970) studyof joint ventures
lead him to concludethat the MNEs shouldnot insiston dominantcontrol
overthe majormanagerial decisionsin joint ventureslocatedin LDCs.He felt
that the sharingof responsibility with local associateswouldlead to a greater
contribution from them and, in turn,to a greaterreturnon investment.The
controlquestionnaire developedby Killingfor use withdevelopedcountryjoint
ventureswas administered by Beamish(1984) to the MNEpartnersin the core
venturesin his LDC sample.There was a significantrelationshipbetween
unsatisfactory performance and overallforeign-dominant control,and between
satisfactory performance andsharedor local-dominant control.In fact,theMNE
partnersin the unsuccessful venturespreferred to operatewithouta partneras
much as possible.Unlikethe MNE partnersin the successfulventures,they
were unwillingto sharecontrolin exchangefor accessto local managersand
theirlocal knowledge.In the successfulsharedcontrolventures,both partners
hadplacedsignificant valueon theothers'contributions overtime.Theperception
of a mutuallong-termneed betweenthe partnersreducedthe propensityto
actopportunistically.
As well, Artisienand Buckley(1985: Table 12) foundthatwherethe MNEs
motivefor preferring a joint venture(overotherformsof tradeand industrial
cooperationwith Yugoslaventerprises) was 'to achievegreaterparticipation in
decisionmaking,'the meansuccessratingfor the JV was 'verysuccessful.' This
correlationbetweenshareddecision-making controlandjoint-venture success
is similarto thatobservedin LDCs.InbothLDCsandsocialistmarketeconomies,
suchas Yugoslavia(see alsoCory1982),MNEsfromdevelopedcountriesmay
well be confrontedwith higheradaptationand information requirements than
theyareaccustomed, thusreinforcing theappropriateness ofjointventures.
10 JOURNALOF INTERNATIONAL
BUSINESS
STUDIES,SUMMER1987

Local Knowledgeand Performance

Beamish's(1984) examination of the importanceattachedby the MNE to the
local partner'sownership-specific assets also provideddata regardingthe
determinants of joint-venturesuccess.Intervieweeswere asked to assessthe
importanceof the partner'scontribution to the ventureof 16 differentitems.
These potentialpartnerneeds were dividedinto five groups(items readily
capitalized,humanresourceneeds,market-access needs,government/political
needs,and knowledgeneeds)of three(or in one case, four)itemseach.The
relativeimportance of eachitemwas measured at threetimes:entry,thepresent,
anda forecastof threeyearshence.
Needsof long-term importancewasdefinedas thosethatweresteadilyimportant
or increasingly at a minimumsignificance
important, levelof .05 or lower(using
Kolmogorov-Smirnov one-sampletest).Needs of short-termimportancewere
those which were important,but decreasingly so. Needs were unimportant if
theyweresteadilyunimportant at a statistical
significancelevelof .05 or lower.
The patternof resultsobservedwhen the importanceof the local-partner
contributions to the MNE were comparedin the successfuland unsuccessful
venturestendedto providesupportfor internalization theory.Differencesin
the value attachedto the importanceof the local partner'scontribution were
observedbetweenthe successfuland unsuccessful venturesin termsof human
resourceneeds,government/political needsandknowledgeneeds.Significantly,
the MNE partnersin the successfulventuresdeemed their local partner's
contributionsof generalmanagers,functionalmanagers,generalknowledgeof
the local economy,politics,and customs,and knowledgeof currentbusiness
practice,as important.Not only werenoneof theselocal-partner contributions
importantto the MNE partnersin the unsuccessful ventures, also these
but
MNEpartners wentso faras to classthe localpartner's contribution of general
andfunctionalmanagersas unimportant. Of significance hereis the association
betweensuccessand obtainingaccessto local knowledge,and the association
betweenlack of successand not attachingimportanceto this local-partner
contribution.In transactioncost terms,the partnership economizedon the
informationrequirements of foreigninvestmentand reduceduncertaintyby
poolingtheirresources.
The only areasin which the MNE partnersin the unsuccessful venturesfelt
theirlocalpartners madeimportant contributions werein the areasof satisfying
existingor forecastgovernmentrequirements forlocalownership.In suchcases,
any local partnerwouldsufficesinceit was only accessto the local partner's
nationality
(asopposedto knowledge) thatwasdesired.Withanynationalsufficing
as a partner,therewouldobviouslybe no smallnumbersconstraint. Yet,when
a partnerwas chosensimplyfor his nationality,poor performance resulted.
Althoughthe MNEimposesthe smallnumbersconditionon itselfby choosing
a partnerwho can contribute knowledge,sucha conditiondoesnot necessarily
becomea dilemma.Asdiscussed earlier,if thelikelihoodof opportunistic
behavior
has alreadybeen reduced(as it is herewhereeach partneracknowledges the
significantcontribution(s)
of the other),smallnumberstransactional difficulties
arealsolower.
EQUITY JOINT VENTURES 11

As notedearlier,wherejoint venturesareestablished in a spiritof mutualtrust

and commitmentto long-termsuccess,opportunism was believedunlikelyto
emerge.Tomeasure commitment anditsrelationshiptojoint-venture performance,
the generalmanagersof 12 JVs were askedto completea questionnaire, the
purposeof whichwas to assesshow characteristic a totalof 16 statements were
of the foreign(MNE) parent-company's attitudesand activitiesvis-a-visjoint
venturesand/or the particular joint venture.Commitment was conceptualized
alongtwo majordimensions: commitment to a courseof action(whichin turn
was subdividedintocommitmentto international businessand commitment to
thejoint-venture structure)andcommitment to theparticular project(subdivided
into commitmentto the particular ventureand commitmentto the particular
partner).
Ratingson each statementwere over a five-pointscale (uncharacteristic (1);
somewhatuncharacteristic (2); average(3); somewhatcharacteristic (4); and
characteristic(5)). The hypothesisgoverningall statementswas thatthe more
characteristica statement,the greaterthe level of commitment, and the better
theperformance of thejointventure.
Basedon theirperformance the joint venturesin the samplewere classified
as eitherhigh or low performers. For each group,the Kolmogorov-Smirnov
one-sampletest was appliedto see if the distribution of responsesto each of
the 16 commitmentstatementscould have come froma randomdistribution.
Inthecaseof thesevenhighperformers, theresponses to sixstatements significantly
(at .05 or better)differedfroma randomdistribution, with statementsbeing
scoredheavilytowardthe "characteristic" end of the scale.In the case of low-
performing ventures,the responsesto one of the 16 itemssignificantly differed
fromrandom,with the statementscoringtowardthe "uncharacteristic" end of
thescale.
Two of the characteristic statementsin the high-performing ventureswere:
management fromthe parentcompanyis quite willingregularlyto visit and
offerassistanceto thejoint venture,and we try to ensurethatthroughregular
meetings,each partnerknows what to expectfrom the joint venture.These
statementsin particularwere consistentwith a sense of commitment-the
of opportunism.
antithesis
Not surprisingly,therewas a strongcorrelation betweenthe commitment results
andseveralotherconstructs - specificallyneedandcontrol.Thosefirmsexhibiting
a willingnessto be flexibleandundertake a particular activitywhilecontrolling
theiropportunistic behavior(commitment)were likely to be the same firms
favouringa sharingof decision-making (control)and looking for greater
contributions(need)fromtheirpartners.

OtherContexts
Observations fromjoint-venture
studiesin slightlydifferent
contextsarereported
in this section.Ninetypercentof the manufacturing subsidiaries
established
by
ThirdWorldmultinationals in Wells'(1983) recentstudywerejoint ventures.
Mostof this investmenttook placein otherdevelopingcountries.Wellsnoted
that the competitiveadvantagewhich the ThirdWorldinvestorscould offer
12 JOURNAL OF INTERNATIONALBUSINESSSTUDIES, SUMMER 1987

derivedfrom technologiesenablingthem to manufacture at low cost. These

technologiesinvolvedsmall-scaleflexibleplantsand considerable use of local
inputs.Due to a lackof dataaboutthe contributions thata localpartnercould
maketo a developingcountryforeigninvestor,Wellsspeculatedthatthe same
contributions important to developedcountryinvestors wouldexist.Consequently,
ThirdWorldMNEsare consideredsimilarto the MNEsfromthe developed
countriesin Beamish's (1984)studyin thatpresumably theycouldbenefitequally
well from the localmarket their
knowledge partners could provide.
Wellsexpectsthe life cyclesof manymanufacturing subsidiariesof developing
countryfirmsto be shortbecausethe MNEis not ableto providea sustainable
competitiveadvantage.While the MNE may continueto requireknowledge
of thelocaleconomy,politicsandculturefromthelocalpartner, thelocalpartner
will be able to copy the MNEscontribution muchfaster.ThirdWorldMNEs
were found to be rarelybuildingtrade names, undertakingresearchand
development, or concentrating theireffortson activitiesfromwhichtheycould
builda sustainable advantage.Whilethe ThirdWorldMNEsdid seem to be
benefitting fromwhatwe havecalledType2 leakagesof proprietary technology,
thesebenefitsweregenerallynot long term.The benefitsof what Wells calls
partialinternalization wouldseem to be shorterfor ThirdWorldMNEsthan
fortheMNEsfromdevelopedcountriesin Beamish's study(1984).
Stuckey's (1983)research indicatedthatvertically
integrated firmsinthealuminum
industrysharedoneof themotivations forforming jointventures withhorizontally
integratedfirms.He founda primaryreasonfor creatingjoint ventureswas
becausetechnicalknow-howand management expertise(intangibleassets)are
not easilyexchangedvia marketsto thesatisfaction of bothsuppliers andbuyers.
Stuckeyfeels the need for "nation-specific" knowledgetypicallyariseswhen
an establishedfirm decidesto investin a countrywhereit has had limited
previousexperience.Localfirmsor groupspossessspecializedinformation on
the country'seconomy,politics,customs,and so on, information thatis costly
andtime-consuming forthe multinationalenterprise to gather.Thisinformation
is moreaccessible andis synthesizedandusedmoreefficiently withintherelatively
cooperativeatmosphereof a joint venture,enablingthe MNE to betterdeal
with the problemof uncertainty. In summary,Stuckeyfeels the joint venture
firmcanbe moreefficientbecauseit allowssomeof theeconomically important
relationshipbetweenotherwiseseparatepartnersto be internalizedby one
organization (1983:152).
Cory (1982), in his researchon industrialcooperationagreementsand joint
venturesbetweenYugoslaventerprises and WesternMNEs,providesempirical
supportthatsuchintermediate mechanisms can, and occasionallydo, represent
viableintermediate, or whathe callsquasi-internalized mechanisms, forresource
allocation.Asinthispaper,Cory(1982:167)notesthatjoint-venture arrangements
can incorporate the essentialelementsof internalized relationships betweenthe
partners.

CONCLUSIONS
Internalization
theory,as it is presently
formulated,
provideslimitedconsideration
of theefficiencyandrevenuegainsavailablethrough joint-venture
arrangements.
EQUITY JOINT VENTURES 13

Althoughthe notionthatlocalfirmsmayhaveresourceswhichcouldbe useful

is not precluded, the theorypositsthatit wouldbe lessexpensivefor the MNE
to developthese resourcesinternallythan to acquirethem by establishinga
joint venture.Due to transactions disabilities
whichare assumedto be inherent
in such interfirmarrangements, whateverthe MNE mightgain in termsof
knowledgeof the local market,customs,businesspractices,contractsand,
government,it would apparentlylose becauseof the costs associatedwith
protectingits intangibleassetsfrom exploitationby the local partner.Thus,
accordingto internalization theory,a rationalprofit-maximizing MNE would
tend to use wholly owned subsidiaries. Yet this view presupposes that none
of Williamson's(1975) transactionaldisabilities- opportunism,bounded
rationality,uncertaintyand small numbersconditioncan be efficientlydealt
within a JV.Bydemonstrating thisassumption neednotholdin allcircumstances
we haveattempted to providea theoretical forjointventureswithin
justification
thecontextof internalization theory.Underparticular arrangements the potential
threatsposedby opportunism and a smallnumbersconditioncan be reduced
to a pointwhereJVsbecomea moreefficientmeansof dealingwithenvironmental
uncertaintyevenin thefaceof boundedrationality.
Previousresearchon joint-venture performance reviewedin thispaperprovides
supportforourview.Notalljointventures arenecessarily unstableorunprofitable
arrangements for MNEs.Beamish(1984) has shown that not only are there
clearlydiscernable in thecharacteristics
differences of successful
andunsuccessful
jointventuresbutalsothatthesecharacteristics areconsistentwiththepredictions
of internalization theoryin its expandedform.Forminga joint venturein an
LDC is not withoutits cost.Nevertheless, the researchwe haveconductedand
reviewedhasshownthatjoint venturesweremoreefficientthanwhollyowned
subsidiariesfor the MNEin LDC marketsundercertaincircumstances andare
consistentwithDunning's (1981)rationalefortheappropriateness ofjointventures
in placeof whollyownedsubsidiaries.
Furtherresearchis requiredto determineif one elementof local knowledge
- economic, political,or cultural- is more significantthan others to MNEs.
Also, becauseonly an LDC-basedsampleof joint ventureswas used,further
researchis requiredto determineif the theoryis applicablein joint ventures
between partnersfrom two developedcountrieswith significantlydifferent
cultures,andtojointventuresbetweenpartners fromtwo plannedeconomies.
Therearea widerangeof international industrial
cooperationmodesnow being
studiedin the contextof internalization.
Thispaperprovidesan expandedrole
foroneof thesemodes,jointventures,in thetheoryof themultinational
enterprise.
NOTES
1. When examiningtheireconomic rationale,it is importantto distinguishbetween equity and contractually-
based joint ventures.In the case of the former, the explicit intention of the partnersis to manage the JV
as a going concern over the long term. ContractualJVs, however, are establishedfor a fixed time period
with the explicit intention of the partnersat the outset to dissolve the relationshipat a specified date. For
a discussionof contractualjoint ventures,see Wright (1981, p.500). In this paper we are concernedonly
with equityJVs.
2. Although the terminologydeveloped by Williamson(1975) can be somewhat turgidfor the uninitiated,
it contains a precisenesswhich we find useful for our present purposes.For definitionsof these terms see
note 3.
14 JOURNAL OF INTERNATIONALBUSINESSSTUDIES, SUMMER 1987

3. Williamson(1975) definesthesetermsas follows:uncertainty/complexity-an environmental condition

wherespecification of the fulldecisiontreeis infeasible; smallnumbers-anenvironmental conditionwhere
onlyone or two marketagentsareavailableto perform the required tasks;opportunism-ahumancondition
manifested by thestrategicmanipulation of information or the misrepresentation of intentions includingself-
interest-seekingbehavior withguile;boundedrationality-ahumancondition characterizedbya limitedcapacity
in termsof knowledge,foresightand skill whichplaceslimitson the individual's abilityto comprehend
complexity: information impactedness-aderivative conditionin whichtheunderlying circumstances relevant
to the transaction, or relatedset of transactions, areknownto one or morepartiesbut cannotbe costlessly
discerned or displayed forothers.
4. In gamesituationsanalogousto MNE-localfirmjointventures, it hasbeenshownthatthe development
of cooperation canbe promoted by a non-myopic player.By adoptinga strategybasedon trustandforesight
the MNEcouldtherefore conveyits commitment to thejointventureandteachthelocalpartnerto respond
in a cooperative fashion.SeeAlexrod(1984)andBramsandKilgour(1985).
5. Whatseemsto oftenbe overlookedby management in the overalleconomicevaluation of jointventures
is thateven thoughthe start-upcostsof whollyownedsubsidiaries may be substantially lower,the long-
termaveragecostsmaybe muchhigherthanjointventuresdue to the verysignificant cost associated with
independent effortsto overcomea lackof knowledge aboutthelocaleconomy,politicsandculture.
6. Clearly,the lowerthe priceto the distributor, the greaterthe profitthatthe distributing partnerdoes
nothaveto share.
7. Contractor (1985)hasnotedthatmanyoverseasventuresarebeingformedas a mixof directinvestment,
licensingand trade.He addsthat the joint-venture partnermay be compensated by a packageinvolving
somereturnon equityinvestments, plusroyalties,plustechnicalserviceand management fees,plusmargins
on components or finishedproducttradedwiththejointventure.
BothSchaan(1983)andBeamish(1984p.39)provideempirical support. InboththeirLDC-based samples,
virtuallynoneof the foreignpartners reliedsolelyon dividendsfor compensation-infacton averagethey
hadnearlytwo additional sources.In contrast, aboutone-third of thelocalpartners reliedsolelyon dividends,
withthebalancehavingoneothersourceof income.
8. Commitment to the successof joint venturesoftenvariesover time.Fromthe MNE'sperspective the
level of ongoingcommitment may be a functionof who in the firmhelpedset up thejoint ventureand
hiscurrent statuswiththecompany. SeeAharoni(1966)andBeamish(1984).
9. Caves(1982) providestwo positivereasons- bothof whichare consistentwith the observations and
transactions approachin this study- thatcauseMNEsto seek out joint ventures.The firstof theseis
the MNE'slackof somecapacityor competence neededto makethe investment succeed.An obviouscase
is theMNEdiversifying geographically andlackingin managerial know-howforcompeting in thenewmarket.
Anotherreasonliesin theMNE'sneedforspecificresources possessed by localjoint-venture partners.These
needsincludeknowledgeaboutlocal marketing or otherenvironmental conditions.In fact,Stopfordand
Wells(1972) observedthatthe majorcontribution to the MNEof localpartners at the timeof formation
of jointventureswaslocalknowledge. Jointventureseconomizeon theinformation requirements of foreign
investment andarethuslikelyto appealwhentheseinformation requirements aremostburdensome. Caves
addsthatjoint venturesseem to be prevalentas MNEsproceedtowardmoreunfamiliar host countries,
citingSaham's(1980:150-51)findingthatjointventures areuncommon in culturally
familiar LDCsettings.
10. In a recentstudyof joint venturesin the U.S.A.,Kogut(1987) foundan instabilityrateas high as
thatwhichuntilnowwasonlyobserved in LDCs.
11. Concluding thatcontrolof thejoint ventureshouldnot be shared,Killingimpliesthatwhollyowned
subsidiaries
maybemoreappropriate thanjointventures inthedeveloped countries.
ThattheseLDCobservations
differfromthosein developedcountries is notinconsistent withtheearlierhypothesis. Killing'sresultssuggest
thatthereare relativelylowerrequirements for adaptation and information for the MNEwhen it invests
inotherdeveloped (versusdeveloping) countries.Insucha case,theMNE'sadvantage-firm-specific knowledge
of production/marketing-is sufficient.
Althoughnot the focusof thispaper,it maybe thatinternalization
theorycanbe reconciled to theviewthatjointventures by MNEsarelessappropriate in developedcountries
thanin LDCs.

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