Partner Selection and Venturing Success: The Case of Joint Ventures with Firms in the People's Republic of China

Abstract

It has been hypothesized in the international joint venture (IJV) literature that partner selection affects interpartner “fit” which in turn influences a synergistic effect on IJV performance. This study investigates the relationship between IJV success and the strategic and organizational traits of local partners. We address this issue in the context of an emerging economy (P.R. China). Newly emerging economies have in recent years become major hosts of direct investment by multinational corporations (MNCs) because these rapidly expanding economies, characterized by an exploding demand previously stifled by ideologically-based government intervention, provide tremendous opportunities which MNCs can preempt. MNCs in such economies, however, face the challenges of structural reform, weak market structure, poorly specified property rights, and institutional uncertainty. Right local partners can help MNCs boost market expansion, obtain insightful information, mitigate operational risks, and provide country-specific knowledge. The analysis of the data obtained from China suggests that both strategic and organizational traits of local partners are significantly associated with some individual dimensions of IJV performance. Among strategic traits, absorptive capacity, product relatedness, and market power are favorable to IJVs' market and financial outcomes. Market power and experience significantly reduce IJVs' operational uncertainties. Of organizational traits, international experience and organizational collaboration are important for IJVs' not only profitability and stability but also local market expansion and export growth. Organizational form and size influence IJVs' local market performance. The findings provided by this study can help MNCs determine what criteria they should use in opting for local partners and what criteria are vital to their goal accomplishment. Those investors seeking local market expansion should select those local partners that have rich market experience, superior market position, high absorptive capacity, and related product diversification with the IJVs. Those seeking profitability and stability should select local firms that have superior international experience, longer organizational collaboration, and greater market power. While MNCs should use appropriate strategic and organizational criteria to select local partners, the host government or local firms can try to make these traits available to attract more stable and profitable foreign direct investment.