Managerial Choice between Equity Joint Ventures and Contractual Joint Ventures in China: A Critical Test of Transaction Cost Economics and Resource-Based View

Abstract

Despite substantial research on foreign direct investment (FDI) in China, there have been few empirical studies on the strategic choice between the two major joint venture (JVs) types, equity joint ventures (EJVs) and contractual joint ventures (CJVs). This paper provides an in-depth analysis of the managerial choice between these two strategies. It also provides a critical test of two main theories, transaction cost economics (TCE) and resource-based view (RBV), in explaining the choice. Data from structured interviews with 55 Sino–Hong Kong JVs in Guangdong province showed that the choice of CJVs over EJVs largely mirrored transaction cost-saving rationale from both Hong Kong and Chinese perspectives. When choosing EJVs over CJVs, there was a larger variety of considerations between Hong Kong and Guangdong partners, and TCE and RBV intertwined in providing insights. The paper shows that transaction costs in setting up and running EJVs vs CJVs are dependent on firm-specific capabilities to negotiate and manage equity or non-equity-based alliance partnerships. While some Hong Kong and Chinese firms chose CJVs to exploit the contracting flexibility allowed in CJV non-equity alliances, others chose EJVs to avoid the same contract attribute, due to lack of ability to manage a flexible partnership.