What makes a joint venture: Micro‐evidence from Sino‐Italian contracts

• Author: Piergiovanna Natale,Valeria Gattai
• Date: 01 November 2013
• DOI: http://doi.org/10.1016/j.rfe.2013.08.005
• Published date: 01 November 2013

What makes a joint venture: Micro-evidence from Sino-Italian contracts

Valeria Gattai, Piergiovanna Natale⁎

Universitàdi Milano-Bicocca,Italy

abstractarticle info

Articlehistory:

Received27 June 2012

Accepted19 August 2013

Availableonline 26 August 2013

JEL classification:

D23

F23

Keywords:

Contractincompleteness

China

Italy

Joint venture

Thispaper provides new contract-levelevidenceon control rightsallocation in orderto define what makes a joint

venture.Property rights theory of the firmidentifies circumstances under whichjoint control alleviates invest-

ment distortionsdue to contract incompleteness. We compare predictionsof the theoretical literature with ac-

tual governancestructures of Sino-Italianjoint ventures, as reported in a questionnairesubmitted to the entire

populationof Italian enterprisesoperating in China.With an exceptional responserate of 60%, our evidencecon-

firms mostof the theoretical predictionsand helps select amongcompeting approachesto model joint ventures.

© 2013 ElsevierInc. All rights reserved.

1. Introduction

In the last twodecades, the world stock of inwardForeign Direct In-

vestment (FDI)

1

has increased almost ten-fold, from 2 trillion USD in

1990 to the record value of 19 trillion USD in 2010. Over the same peri-

od, world flows of inward FDI rose by almost900%, peaking at 1.9 tril-

lion USD in 2007 (UNCTAD, 2011). A substantial share of these flows

and stock is in partnership with local enterprises, with joint ventures

(JVs) and international alliances playing a prominent role (Buchel,

2003; Moskalev & Swensen, 2007). The literature on the foreign entry

mode focuses on equity JVs as opposed to wholly owned affiliates.

Thisis a neat distinction,but it does little to unveilthe nature of partner-

ships between foreign and local firms. Widely used in international

businessstudies (Wei,Liu, & Liu, 2005), attentionis on the determinants

of equityshares leaving unansweredquestions aboutcontrol. Nonethe-

less, controlfeatures prominentlyin anecdotal evidenceabout business

relationsand is shown to be of paramountimportancewhen and where

contract enforceability is an issue (Midler, 2009). A framework to ad-

dress the issue of control allocation between cooperating partners is

provided by the residual rights of control or property rights theory of

the firm (Grossman & Hart, 1986; Hart & Moore, 1990). According to

the theory, optimal allocation of control rights depends on the nature

and importanceof the parties' investments and it cantake the form of

sole ownershipor joint control.

In thispaper we ask: do joint venturecontracts presentfeatures con-

sistent with the predictions of the property rights theory? Do we ob-

serve joint ventures when the optimal allocation of control rights is

joint control? In brief: what makes a joint venture? To answer these

and other related questions, new contract-level evidence is provided.

Survey interviews submitted by the authors in the period 2010–2011

to the entire population of Italian enterprises with JVs in the People's

Republic of China(PRC) are the source of the original data for this re-

search. The choiceof the home and host markets is inspired by recent

evidence about cross-country alliances. The well documentedpreference

of Italian entrepreneurs for joint ventures vs. wholly foreign owned en-

terprises makes Italy a suitable focus of our study (see, among others:

Bontempi & Prodi, 2009; Gattai, 2010; Morresi & Pezzi, 2011). The largest

FDI recipient in the world after the US, China is known for shared owner-

ship of foreign affiliates, even though wholly foreign owned enterprises

have been allowed since the 1980s (Moskalev & Swensen, 2007).

According to the China Statistical Yearbook (2012), over th e period

2005–2011 JVs account for a notable 20%of total FDI inflows, both by

number of projects and capital flows.Finally, cultural distance and the

very fast pace of change characterising the Chinese economy make

FDI operations in Chinaparticularly suitable to study how firms select

governancewhen contract incompletenessis pervasive.

With an exceptional response rate of 60%, we document the main

characteristics of 77 Sino-Italianjoint venture contracts, offering an un-

precedentedlarge number of details aboutthe negotiation process,es-

tablishment of JVs and investment decisions, as well as control rights,

equity shares and governance issues. To the best of our knowledge,

this is the first attempt at collecting survey data on international

Reviewof Financial Economics 22 (2013)194–205

⁎Correspondingauthor at: Università di Milano-Bicocca, Piazza dell'Ateneo Nuovo 1,

20126 Milano,Italy. Tel.: +39 0264483095;fax: + 39 0264483085.

E-mailaddress: piergiovanna.natale@unimib.it(P. Natale) .

1

Consistentlywith IMF/OECD definitions, FDI is an investment in a foreign company

wherethe investorowns at least 10% of the ordinaryshares, undertakenwith the objective

of establishinga lasting interestin the country,a long-term relationship,and a significant

influenceon the management of the firm (IMF,1993; OECD, 1996).

1058-3300/$–see front matter © 2013 ElsevierInc. All rights reserved.

http://dx.doi.org/10.1016/j.rfe.2013.08.005

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