Mitigating Institutional Distance Between IJV Partner Countries by Choosing a Governing Law

Abstract

This study explores answers to the following questions: To what extent are the provisions in international joint venture agreements affected by the institutional distance between countries of partners? And how can IJV partners mitigate institutional distance? Using fine-grained data on 251 international joint venture contracts signed in between 2000 and 2016, we identified all contact provisions/clauses used in IJVs and classified them into three groups of clauses, namely (1) management & organization, (2) control, and (3) operation through factor analysis. We then linked the three groups to the multiple dimensions of institutional distance (i.e., cross-country differences in legal environment, the court, normative, and cultural-cognitive). Empirical results reveal that the control clauses are more frequently used when there is a greater degree of legal environment distance and court distance. However, the need to use the control clauses is mitigated by the choice of law clause choosing a governing law country that is different than the location of IJVs. Normative distance increases the frequency of operation and management & organization clauses. Finally, the use of management & organization and control clauses is increased when there is a greater degree of cognitive distance. These findings provide insightful implications to industry practitioners, extend the Transaction Cost Economics, and advance alliance governance literature as well as institutional theory.