Explaining alternative termination modes of international joint ventures

Palitha Konara,Alex Mohr,Zita Stone

doi:10.1108/imr-02-2019-0085

Abstract

PurposeThe authors combine options logic with transaction cost economics to explain why firms maintain, divest or buy out their international joint ventures (IJVs). It is suggested that a decline in environmental risk and higher partner-related risk makes a firm more likely to acquire an IJV but less likely to divest an IJV. The study also investigates how IJV age moderates the effects of a decline in environmental risk and higher partner-related risk.Design/methodology/approachThe study employs competing risks analyses to examine the drivers of different termination outcomes using a dataset consisting of 459 IJVs in the People's Republic of China, of which 110 were either acquired or divested by their foreign parent.FindingsThe study finds that changes in environmental risk and partner-related risk affect how firms terminate their IJVs in the People's Republic of China. Specifically, the authors find that the effect of exogenous and endogenous risk are more pronounced for the acquisition of IJVs than for the divestment of IJVs.Research limitations/implicationsThe study contributes to international marketing research by complementing options logic with transaction cost economics to provide a theoretical explanation of the different ways in which IJVs in the People's Republic of China are terminated.Practical implicationsIJVs continue to be an important yet often unstable method to serve international markets. Our findings increase managers' awareness of the effect that two important sources of risk may have on the termination of IJVs in the People's Republic of China.Originality/valueThe study provides novel insights into the effect that changes in exogenous and endogenous risk have on a firm's choice of termination mode drawing on novel data on the different ways in which foreign firms have terminated their IJVs in the Peoples' Republic of China.

Highlights

The establishment of an international joint venture (IJV) as an entry mode when firms seek to expand overseas is a topic that has been widely considered in international marketing research, drawing on theories, such as transaction cost economics (TCE) and the real options perspective (e.g. Brouthers et al, 2003; 2008; Kogut, 1988a; Nippa and Reuer, 2019; Surdu et al, 2018)
We expected that a decline in environmental risk in the Peoples’ Republic of China (PRC) would increase the likelihood that a foreign firm will acquire its IJV
We expected that a decline in environmental risk in the PRC would reduce the likelihood that a foreign firm will divest an IJV

Summary

Introduction

The establishment of an international joint venture (IJV) as an entry mode when firms seek to expand overseas is a topic that has been widely considered in international marketing research, drawing on theories, such as transaction cost economics (TCE) and the real options perspective (e.g. Brouthers et al, 2003; 2008; Kogut, 1988a; Nippa and Reuer, 2019; Surdu et al, 2018). The establishment of an international joint venture (IJV) as an entry mode when firms seek to expand overseas is a topic that has been widely considered in international marketing research, drawing on theories, such as transaction cost economics (TCE) and the real options perspective Brouthers et al, 2003; 2008; Kogut, 1988a; Nippa and Reuer, 2019; Surdu et al, 2018). We still know relatively little about why and how firms terminate an IJV. Firms can terminate an IJV in different ways, for example, by selling their stake in an IJV or. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode

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Conclusion