Strategic, organizational, and cultural fit: effects on performance in China-U.S. joint ventures.

• Author: Heiman, Bruce A.

INTRODUCTION

The determinants of high-performance in joint ventures (JVs) have been extensively studied. Many scholars have offered insights into factors that affect economic and other measures of JV success or failure. Recently, part of the literature has converged on particular specific important categories of factors, unified by the concept of fit. Based on the literature, we argue and test for the primacy of three particular fit-related factors' effects on JV performance. Our work rigorously explores the effects of all three of these factors on JV performance. Using detailed data comprised of over 80 recent China-U.S. joint ventures operating in China, this primarily empirical article scrutinizes the impact of strategic, organizational and cultural fit on JV performance. The arena of China-U.S. equity-based joint ventures is rich and diverse, providing an appropriate venue for a study of the three specified categories of partner-fit.

When considering the extant "literature of fit," we are struck by the preponderance of studies theorizing about or empirically focused on one rather than all three factors. Some scholars look at many factors (e.g., Douma et al, 2000), but treat only one or two of the three factors we assert the literature identifies as critical. Part of the reason for this may be a lack of agreement in the literature as to precisely which observable phenomena and managerial attitudes comprise valid measurements of fit. In the first sentence of the conclusion to their article, Hennart and Zeng (2005:113) assess the situation well: "The literature on the determinants of alliance performance is increasingly diverse, with no clear consensus as to what the dependent and independent variables ought to be." Our study partly addresses this issue by acknowledging the diversity in definitions of fit and suggesting two very different definitions for each of three types of fit--strategic, organizational and cultural. Therein lies a major part of our contribution: we test a reasonably complete model of the determinants of JV performance using a well-controlled-for, diverse set of reliable measures of fit. Additionally, we construct and model four independent measures of JV performance, our dependent variable: perceived satisfaction with JV performance, perceived prior financial performance trends, perceived overall competitiveness of the JV, and perceived efficacy of JV decision making structure. We use diverse JV performance indicators in recognition of the myriad ways in which performance may be measured. Our approaches to measuring our independent variables as well as performance, while admittedly imperfect, avoid some issues encountered by other scholars.

The academic literature concerning international joint ventures has its roots in the 1980s, and is admittedly vast. In this paper, for simplicity, we confine our attention to papers explicitly concerned with fit between equity-based joint venture partner-firms. By focusing our discussion of the literature on papers discussing fit and JV performance, we usefully narrow the universe of our citations. A number of notable, foundational works looking at JVs are not, however, explicitly concerned with fit, and bear brief mention. One core work, Anderson and Gatignon (1986) looks at the determinants of foreign entry mode. Teece (1981) examines far-sighted efficiency of governance safeguards under a transaction cost lens when the activity is sharing knowledge between international partner-firms. Both articles look at the determinants of governance choice (the dependent variable) and assume performance is high. This is a common feature of early analyses; their intent was to shed light on the bases of governance choice. Hennart (1988;1991) advances thinking about JVs by micro-analytically looking at two bases for market failure that JVs serve to remedy: scale and link JVs both solve different market failure scenarios. Kogut and Zander (1992) assert a "social community" effect over Hennart's more Spartan (more farsighted) logic: social network-based knowledge recombination within the firm competes with the need to collaborate between JV partner-firms--the market for collaboration with outsiders is considered thin. Despite drawbacks, Kogut and Zander's analysis of important knowledge-based contingencies is valuable and sheds some light on how successful JVs operate. More recently and more in the spirit of our work, Hennart and Zeng (2002) showed that cross-cultural differences affect JV longevity (where longevity proxies performance). Dhanaraj and Beamish (2004) look at the effects of different equity ownership structures, also on longevity. Longevity is a good measure of performance, but it is not the only one. Although focused on our independent variables of interest, the pioneering antecedent literature noted above generally neglects to measure performance in a simple, meaningful cross sectional sense, e.g., financial outcomes after multiple years of JV operations, an issue addressed by our work.

This paper proceeds as follows: first we discuss the literature on "fit" in four parts, starting with (a) studies that treat multiple aspects of fit (works with main thrusts close to our own). We then briefly (b) discuss a particularly relevant study regarding joint ventures, and (c) offer our own definitions of fit, partly based on the literature. We also (d) argue for six fit-savvy testable hypotheses--we touch on the specific literature for each of the two components of fit derived from the three main fit-categories. We subsequently describe our methodology and the sample data as well as variable construction. We then present the results of a data analysis using ordinary least squares regression. Finally, we discuss the implications of the results, issues, and future directions for this line of research.

LITERATURE OF FIT RELATED FACTORS' EFFFECTS ON PERFORMANCE

In an article that discusses managing the dynamics of fit, Douma et al (2000:582) present a "generic fit framework" and conclude that alliance success requires good fit in no fewer than five areas: strategic fit; organizational fit, cultural fit, operational fit, and human fit. These five types of fit are all purported to be indispensable for alliance success. Their work focuses primarily on strategic and organizational fit, and takes a (useful) dynamic rather than static view of fit whereby the degree of fit may be improved over time. The authors maintain that the more partner-firms complement one another, the greater the probability that an alliance will be successful (resource complementarity). Other drivers for strategic fit include the compatibility of strategies (similar to this paper's congruence of objectives) and strategic importance.

Regarding organizational fit, Douma et al (2000) focus on ex ante alliance design/building issues, such as alliance potential and feasibility) and maintain that a good design should address organizational differences, provide flexibility, and enable effective management control for both partners. Their approach avers that fit may be "designed into" alliances. Although dynamic, Douma et al's focus on alliance design does not offer insight into important organizational fit issues that may arise after the JV is established and operating--far-sightedness with respect to performance is lacking. Alliance design, given the impossibility of complete contracting (Williamson 1975), can never articulate a complete set of contractual clauses that precisely mandate the scope of knowledge-sharing, or the precise delineation of scope and division of work prior to a JV building some operating experience. Contracts are necessarily incomplete, and besides measuring efficacy of the alliance design activity, this line of research is of limited utility in predicting successfully operating JVs. Our work acknowledges that transaction cost factors affect a JV's performance.

Although they offer meaningful insights, Douma et al base their extensive conclusions on a case study, potentially limiting the generality of their findings. Their chosen case study JV excelled at all five of their specified fit parameters. This seems to us to represent an onerous standard for a successful alliance. We suggest that it may be possible for a JV to experience high performance under less than "perfect" conditions, i.e., when not all factors are optimal.

Faure (2000) discusses the impact of strategic, organizational and cultural issues on performance in the setting of negotiations prior to entering into a JV Significant difficulties encountered by both parties during negotiations are explored and divided into three categories: strategic, cultural, and organizational cause. These areas correspond strongly to our conception of strategic, cultural, and organizational fit, but, like Douma et al, since Faure applies his framework solely to the negotiation process, the results are of limited use for us--they ignore the nature and extent of performance during a JV's lifetime. Faure's strategic cause corresponds to one part of strategic fit for us: congruence of objectives between partners is a primary factor determining the success of negotiating outcomes (in our study, JV performance outcomes).

Regarding cultural causes (what we call cultural fit), at the beginning of negotiations two parties agree to cooperate based on their respective knowledge, procedures and resources--initial characteristics that are frequently very different for each partner. Mutual partner-ignorance of the details of firm-specific cultural nuances ensues--partner-firms are uncertain of the endowments and practices of their partners. These cognitive gaps are dangerous because they are not necessarily perceived directly, and may introduce periods of costly mutual misunderstanding (Heiman and Nickerson 2004). Commonality of partners' cultures is positively associated with performance. For Faure, performance comprises the...