Environmental Risks and Joint Venture Sharing Arrangements

Abstract

Multinational enterprises (MNEs) have responded to the open-door policies of socialist countries in recent years by investing in their economies through joint ventures. MNEs must formulate their investment strategies to control and manage the environmental risks peculiar to a traditional centrally planned economy (CPE) in which contextual and transactional environments are blurred. Joint venture sharing arrangements may be structured to control exposures to uncertainties and to align the interests of transactional parties, mostly state-owned enterprises, to those of the venture. This study tests the hypothesis that a foreign investor's share in a joint venture in a CPE is inversely correlated with (1) the amount of uncertainties and risks and (2) the external dependency of the venture on the contextual and transactional relationships of the host country. The hypothesis is supported by empirical evidence from data on American joint ventures in China.