Post‐Formation Inter‐Partner Equity Transfers in International Joint Ventures: The Role of Experience

• Published date: 01 November 2014
• Author: Akie Iriyama,Ravi Madhavan
• Date: 01 November 2014
• DOI: http://doi.org/10.1002/gsj.1086

POST-FORMATION INTER-PARTNER EQUITY

TRANSFERS IN INTERNATIONAL JOINT

VENTURES: THE ROLE OF EXPERIENCE

AKIE IRIYAMA1* and RAVI MADHAVAN2

1Graduate School of Commerce, Waseda University, Tokyo, Japan

2Katz Graduate School of Business, University of Pittsburgh, Pittsburgh,

Pennsylvania, U.S.A.

Under what conditions is an IJV partner likely to acquire its counterpart’s equity stake upon

a market cue of more opportunities; or sell its own equity stake to the counterpart upon a

market cue of fewer opportunities? The puzzle springs from the premise that, upon a market

cue, both the MNE partner and the local IJV partner are motivated to appropriate value in

a manner consistent with the direction of the market cue. However, only one partner can

change the ownership share in its favor. Building on the real options logic and the experi-

ential learning perspective, we suggest that the local partner is more likely to realign own-

ership share in its own favor, all else equal. However, an MNE’s cumulative operational

experience overturns this. Our model is supported by data on Japanese automotive supplier

IJV equity changes over an 18-year period. Copyright © 2014 Strategic Management

Society.

INTRODUCTION

International business research suggests that a firm’s

experience in the host country influences its interna-

tional collaborations such as joint ventures (e.g.,

Chang, 1995; Henisz and Delios, 2001). Investment

activity in a market represents experience-based

organizational learning that develops capabilities to

effectively exploit opportunities (Lichtenthaler,

2009). Experienced international joint venture (IJV)

partners, thus, seek market opportunities that lever-

age experiential learning from prior operational

experience in the country (Martin and Salomon,

2003). This stream of research investigates the influ-

ence of experience on the IJV’s initial structure (e.g.,

Delios and Beamish, 1999) and on IJV performance

such as survival and profitability (e.g., Li, 1995; Luo

and Peng, 1999). In contrast, there are still few sys-

tematic empirical studies that examine how the expe-

rience influences post-formation relational dynamics

between partners during the IJV’s operation. This is

a critical gap in the literature, as IJV environments

are dynamic and can change radically over time. IJV

partners must flexibly adjust the IJV’s operation,

governance, contractual structure, and strategy in

response to changes in the environment after IJV

initiation (e.g., Doz, 1996; Reuer, Zollo, and Singh,

2002; Reuer and Ariño, 2007).

In this study, we focus on inter-partner equity

transfers during the life course of IJVs in which

partners have the opportunity to respond to emerging

environmental changes. Prior research has suggested

that an (I)JV ownership change can be triggered, at

least partially, by an external environment change.

While some studies suggest IJVs can be stable

Keywords: experience; market cue; international joint venture;

ownership equity acquisition; ownership equity divestment;

real options

*Correspondence to: Akie Iriyama, Graduate School of Com-

merce, Waseda University, 1-6-1 Nishiwaseda, Shinjuku-ku,

Tokyo, Japan, E-mail: airiyama@gmail.com

Global Strategy Journal

Global Strat. J., 4: 331–348 (2014)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/gsj.1086

Copyright © 2014 Strategic Management Society

(Delios and Beamish, 2004), the real options view in

particular sees JVs as transitional devices through

which the partners seek to grow, abandon, or keep

the status quo through their operation process, and

that specific market cues signaling more (or fewer)

opportunities trigger the exercise of such decisions

(Kogut 1991; Kouvelis, Axarloglou, and Sinha,

2001). This is particularly true for IJVs serving the

local market, in which partners see market cues as a

signal of emerging, or declining, opportunities.

Building on this theoretical base, we suggest that

an unexplored question remains: why a given firm,

rather than its JV partner, seizes the emerging/

declining opportunity. In two-partner JVs, inter-

partner equity shifts are a zero-sum game: a partner’s

equity acquisition (divestment) is synonymous with

its counterpart’s equity divestment (acquisition).

Even when both the multinational enterprise (MNE)

partner and local partner observe the market cue

signaling more opportunities, only one of them can

actually increase equity stake in the IJV to seize the

corresponding opportunity, with the counterpart

reducing its equity share. Similarly, upon a market

cue signaling fewer opportunities, only one partner

gets to sell its equity to the counterpart. Given this

reality, we still do not know why a specific partner,

i.e., MNE partner or local partner, is more likely to

buy or sell an equity stake in its own favor upon the

market cue (Reuer and Tong, 2007).1While this

question is conceptually applicable to any JV, it is in

particular salient for international JVs where the

partners have distinctive locational identities i.e.,

MNE partner and local partner.

By incorporating the view of organizational expe-

rience in the logic of market cue response, we posit

that a partner’s prior experience serves to determine

how likely it is that the MNE, or the local partner,

can alter its IJV ownership structure in its own favor

upon the market cue. All else equal, MNEs may have

a handicap over their local counterparts in terms of

the managerial and organizational skills necessary to

acquire signals about the market, interpret them

accurately, and act upon them (Durand, 2003;

Milliken, 1987, 1990; Zaheer, 1995). Thus, a local

partner may have a relative advantagein changing its

ownership share. As the MNE accumulates opera-

tional experience in the host country, however, it will

be in a better position to spot signals faster and to act

upon them, including nudging the partner into yield-

ing the opportunity. We test our hypotheses using a

longitudinal dataset of equity ownership change in

Japanese automotive suppliers’ IJVs over 18 years.

Overall, this study contributes to the literature by

positing experience as a plausible driver of effective

cue recognition and response to account for a key

unexplored question in IJV ownership dynamics.

BACKGROUND

IJV ownership change and market cues

The division of equity ownership between IJV part-

ners is a central element in the governance structure

of the alliance (e.g., Beamish and Banks, 1987).

Whereas a number of studies have examined the

initial ownership distribution at IJV inception from a

variety of viewpoints (e.g., Chi and Zhao, 2014, this

issue; Hennart, 1988; Li and Li, 2010; Merchant,

2014, this issue), in reality, partners change equity

ownership shares even after IJVinception by buying/

selling each other’s equity shares. Hennart, Roehl,

and Zietlow (1999) report, for instance, that 37 of 58

IJVs in their sample experienced such ownership

change during the nine years after inception. Accord-

ingly, researchers have begun to study IJV owner-

ship changes after inception, concluding that such

changes are facilitated by inter-partner conflict

(Chung and Beamish, 2010), knowledge transfer

(Steensma et al., 2008), or a partner’s potential

opportunistic behavior (Puck, Holtbrügge, and

Mohr, 2009). They also have employed the options

perspective, which this study employs as baseline

logic, to examine ex post ownership changes in JVs

(Chi, 2000; Folta and Miller, 2002).

Researchers have also identified the dynamic shift

of external environments during the IJV’s life course

as a critical factor driving a partner to reconsider

ownership structure (Ariño and de la Torre, 1998;

Kouvelis et al., 2001). Extant studies adopting the

options perspective also suggest that a market cue is

a critical factor in triggering IJV ownership change

(Kogut, 1991). In this perspective, by forming an

IJV, a firm defers a full commitment of its resources

to the venture by sharing resources with its partner

(Folta, 1998; Li and Li, 2010). It simultaneously

1We do not imply that when one partner acquires (divests)

equities, its counterpart is always worse off.As we discuss later,

the counterpart will likely receive some other compensation—

e.g., funds to invest in another business. Our research question

focuses on the direction of equity shift within the IJV: One JV

partner’s equity acquisition is synonymous with the other part-

ner’s equity divestment. We seek to understand which partner

takes which role in this equity shift and why.

332 A. Iriyama and R. Madhavan

Copyright © 2014 Strategic Management Society Global Strat. J., 4: 331–348 (2014)

DOI: 10.1002/gsj.1086