Configurations of Governance Structure, Generic Strategy, and Firm Size: Opening the Black Box of Value Creation In International Joint Ventures

• DOI: http://doi.org/10.1002/gsj.1084
• Author: Hemant Merchant
• Date: 01 November 2014
• Published date: 01 November 2014

CONFIGURATIONS OF GOVERNANCE

STRUCTURE, GENERIC STRATEGY, AND FIRM

SIZE: OPENING THE BLACK BOX OF VALUE

CREATION IN INTERNATIONAL JOINT VENTURES

HEMANT MERCHANT*

Kate Tiedemann College of Business,

University of South Florida-St. Petersburg, St. Petersburg, Florida, U.S.A.

To better identify the antecedents of joint venture (JV) performance, we investigate the sin-

gular and joint effects of: (1) JV governance structure (shared control; dominant control);

and (2) JV competitive strategy (cost leadership; differentiation; hybrid) on stock market

expectations of American parents’ JV performance. We combine arguments from the JV

governance, generic strategy, and organizational studies literatures to delineate the strategy-

structure-size configurations required for creating superior abnormal returns. In doing so,

we also unpack the moderating role of firm size vis-à-vis strategy-performance and

structure-performance relationships. Our efforts contribute to a more sophisticated under-

standing of the mechanisms for creating shareholder value in American manufacturing firms

who participate in international JVs. We generate five hypotheses and find full or partial

support for them in our sample of almost 200 international JVs. Copyright © 2014 Strategic

Management Society.

INTRODUCTION

The formation of joint ventures (JVs) is based on the

premise that these ventures create economic value for

participating firms. Yet, empirical studies investigat-

ing the performance implications of JV formations

have reported mixed and contradictory results (e.g.,

Reus and Rottig, 2009). Researchers have frequently

attributed this outcome to a piecemeal examination of

singular variables, many often selected on an ad hoc

basis (Ren, Gray, and Kim, 2009; Robson, Leonidou

and Katsikeas, 2002). Such ‘. . .rather simplistic’

(Klijn et al., 2010: 586) treatments only marginally

promote our understanding of a phenomenon that has,

for decades, garnered tremendous scholarly attention

worldwide. Indeed, as Klijn et al. (2010: 586) submit,

studies that ‘. . .accommodate multiple perspectives

simultaneously in a single paper would significantly

advance the field.’ Our study is a direct response to

their insightful observation, albeit in the context of

shareholder value creation vis-à-vis public announce-

ments of American firms’ participation in interna-

tional JVs.

Although researchers have long studied JV value

creation from ‘governance’ (e.g., Geringer and

Hebert, 1989) as well as ‘strategy’ (e.g., Koh and

Venkatraman, 1991) platforms, these views have

only been minimally integrated (e.g., see Merchant

and Schendel, 2000). In general, these parallel inqui-

ries create a distorted view of the organizational

reality (Galan and Sanchez-Bueno, 2009) surround-

ing mini-organizations that JVs essentially are. In

fact, researchers have compounded the above-

Keywords: governance structure; competitive strategy; firm

size; joint ventures; value creation

*Correspondence to: Hemant Merchant, Kate Tiedemann

College of Business, University of South Florida—St. Peters-

burg, St. Petersburg, FL 33701, U.S.A. E-mail: hmerchant@

usfsp.edu

Global Strategy Journal

Global Strat. J., 4: 292–309 (2014)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/gsj.1084

Copyright © 2014 Strategic Management Society

mentioned deficiency by ignoring the role of a key

organizational contingency—firm size (e.g., Ellis

et al., 2011; Grinyer and Yasai-Ardekani, 1981;

Spanos, Zaralis, and Lioukas, 2004; Tihanyi and

Thomas, 2005)—thus further obscuring the strategy-

structure-performance relationship in complex orga-

nizational forms such as international JVs. One

implication of these observations is that there is an

urgent need to move beyond singular, unitheoretical

explanations of JV performance. Thus, there is also a

need for deeper theoretical understanding about

mechanisms via which participation in international

JVs leads to shareholder value creation. We contrib-

ute to these imperatives by investigating the singular

as well as collective impact of: (1) JV competitive

strategy; (2) JV governance structure; and (3) firm

size of American parents on these firms’ shareholder

value that is associated with the formation of these

ventures.

We define JV competitive strategy in terms of the

American parents’ generic approach to business

development via JVs: cost leadership, differentia-

tion, or a combination thereof (Porter, 1980). Simi-

larly, we define JV governance structure in terms of

the type of control arrangement between parents

over their JV operations: shared control or dominant

control. Finally, we define firm size in terms of the

number of employees in American firms because of

the influence of size on relationships among firm

strategy, structure, and performance.We discuss how

joint examination of these constructs facilitates a

more refined understanding of shareholder value cre-

ation via JVs.

To that end, we unpack previous arguments about

the singular effect(s) of JV generic strategy as well

as JV governance structure on firm performance.

Next, we combine these arguments into a more cohe-

sive picture of performance—one that also explicitly

recognizes the role of organizational size on firms’

shareholder value creation. Thus, we theoretically

advance the JV literature. Moreover, we empirically

identify strategy-structure-size configurations that

augment American parents’ shareholder value. We

find full or partial support for all five hypotheses

based on our analysis of almost 200 international

JVs. Our findings underscore the nature of fit

between JV competitive strategy and JV governance

structure and the implications of this agreement for

shareholder value creation. Additionally, our find-

ings highlight the moderating role of parents’ size

vis-à-vis shareholder value. These findings advance

the current literature by deconstructing—and then

interrelating—the theorized effects of three salient

influences on value creation. We believe our work is

the first of its kind in JV research.

THEORY AND HYPOTHESES

In his seminal work, Porter (1985) identified two

forms of competitive strategies—cost leadership and

differentiation—and discussed their performance

implications for firms. Porter identified a third strat-

egy (i.e., stuck in the middle) in which firms alter-

nated between the two strategies without dedication

to either of them. As is well known, cost leadership

relies heavily on ‘. . .vigorous pursuit of cost reduc-

tions along the value chain (that are) driven by expe-

rience, tight cost and overhead control, and cost

minimization in (functional) areas’ (Spanos et al.,

2004: 141). Clearly, this focuses inwardly within the

firm (Thornhill and White, 2007). In contrast, differ-

entiation relies on innovation, whether marketing

based (e.g., superior, more persuasive advertising)

or R&D based (e.g., new product creation)

(Miller, 1986, 1988). Clearly, a differentiation-based

approach to competition is ‘. . .more outwardly

focused on innovation, discovery, customers/buyers,

product differences, responsiveness, flexibility, and

expansion’ (Thornhill and White, 2007: 554).

However, ‘stuck in the middle’competitive position

is ‘. . .often a manifestation of a firm’s unwillingness

to make choices about how to compete. It tries for

competitive advantage through every means and

achieves none, because achieving different types of

competitive advantage usually requires inconsistent

actions’ (Porter, 1985: 17; italics in original). Thus,

the joint pursuit of cost leadership and differentia-

tion is expected to result in lower, or possibly nega-

tive, performance than if a firm solely pursued a cost

leadership or differentiation strategy.

Despite Porter’s contention about the perils of

being ‘stuck in the middle,’ several researchers have

argued otherwise. Theoretically, firms can pursue

cost leadership and differentiation strategies simul-

taneously (e.g., Hill, 1988a; Murray, 1988; Miller

and Dess, 1993), and empirical observations indicate

they indeed do so (Miller and Friesen, 1986a;

Thornhill and White, 2007)—often with higher

returns than those involving the singular pursuit of

either cost leadership or differentiation (Miller and

Friesen, 1986b; Murray, 1988; Spanos et al., 2004;

Thornhill and White, 2007; White, 1986). Research-

ers have labeled this joint pursuit of cost leadership

Value-Creating Configurations of Structure, Strategy, and Size 293

Copyright © 2014 Strategic Management Society Global Strat. J., 4: 292–309 (2014)

DOI: 10.1002/gsj.1084