Governance structure and the creation and protection of technological competencies: international R&D joint ventures in China.
| Verfasser | Li, Jiatao |
| Posten | RESEARCH PAPER - Report - Statistical data |
Abstract International research and development (R&D) joint ventures have been widely used by multinational enterprises (MNEs) to enhance knowledge creation in a global network of foreign subsidiaries while at the same time, managing the critical task of protecting the knowledge transferred and created. In emerging economies where institutions for protecting intellectual properties are likely to be weak, equity joint ventures (EJVs) are often used to meet the needs for knowledge protection by aligning the interests of partners in collaboration. However, the advantages of using EJVs come at a price--higher organizational cost and lack of flexibility. This study suggests two key factors that would affect the choice of EJVs as a risk-mitigating mechanism in protecting technological competencies: the scope of R&D activities and the types of joint venture (JV) partners. We propose that MNEs can reduce their use of EJVs when the scope of R&D activities is limited to research-oriented ones or when academic institutions are chosen as local partners. Furthermore, a large cultural distance between the host and home countries of MNEs tends to strengthen these effects. Collecting data from China Business Review, Business China, and the LexisNexis and Proquest databases, the authors conducted an empirical test with data on 319 international R&D JVs established in China during 1995-2002. The results largely support these hypotheses.
Keywords R&D internationalization * Joint venture * Entry mode * Partner choice * R&D scope * China
1 Introduction
Multinational enterprises (MNEs) have increasingly been internationalizing their R&D activities to: (1) take advantage of host country scientific and technological inputs, and (2) respond to local market needs and innovate closer to their product markets and manufacturing facilities (Arvanitis and Hollenstein 2011; Belderbos 2003; Li and Xie 2011; Li and Zhong 2003; Luo 2006). Specifically, by engaging in international R&D joint ventures (JVs), MNEs are able to focus on and invest in a few areas of core competencies, to leverage the resources and capabilities of local partners in other areas, and to reduce the uncertainty inherent in operating in unfamiliar foreign business environments (Dunning 1994; Frankort et al. 2012; Marin and Siotis 2008). Despite these advantages, the efforts made by MNEs to develop new technological competencies through international R&D JVs, such as by transferring and recombining knowledge, are likely to put their technological competencies at risk of misappropriation (Evangelista and Hau 2009; Li et al. 2008; Rivkin 2001). This creates tension between the creation and the protection of technological competencies abroad. MNEs have been found to use equity joint ventures (EJVs) to manage this tension. Compared with contract-based governance structures, equity-based ones can help align the interests of the partners and thus better protect technological competencies from potential misappropriation by opportunistic partners (Che and Facchini 2009; Garcia-Canal et al. 2008; Elennart 1988; Li and Xie 2011; Pisano 1989).
However, compared with contract-based joint ventures (CJVs), EJVs incur greater organizational cost and provide less flexibility (Dussauge and Garette 1999; Hagedoom 1993; Kogut 1988; Porter 1987). This could become a critical issue as the importance of flexibility and adaptability for MNEs' global success continues to grow in the increasingly uncertain world (Koza et al. 2011). Thus, when the risk of knowledge misappropriation is lower, MNEs tend to replace EJVs with CJVs. Previous literature suggests that the risk of knowledge misappropriation is reduced by MNEs through (1) limiting the scope of R&D activities (Li et al. 2008; Oxley and Sampson 2004); or (2) choosing appropriate JV partner(s) who are not likely to become direct competitors (Kang and Kang 2010; Li et al. 2008).
Unfortunately, prior research has not adequately addressed the following two concerns. First, besides the advantages over CJVs in terms of knowledge protection, EJVs are also good at facilitating knowledge sharing and transfer in international R&D JVs by providing a more stable structure and more frequent interactions between more committed partners (Jiang and Li 2009; Phene and Tallman 2012). While CJVs may replace EJVs to increase partnership flexibility when the concern over knowledge protection is reduced, they may still reduce the effectiveness of the partnership if the partners do not value the flexibility offered by the contract-based governance structure. Therefore, when MNEs consider replace EJV with CJV, they need to take into account not only knowledge protection but also the importance of flexibility in knowledge creation. This has not been adequately addressed in previous literature. Second, prior research has largely ignored the heterogeneity among partnerships. Because EJVs may suffer from higher organizational costs than CJVs, the use of EJVs will most likely be reduced for those partnerships that suffer more organizational costs, especially when the concern over knowledge protection is reduced with limited scope of R&D activities or less opportunistic partners.
The current paper tries to fill these gaps by investigating how MNEs chose governance structures in international R&D JVs in China from both the perspective of knowledge protection and knowledge creation. Since the inputs and outputs of research-oriented R&D activities are less likely to be subject to appropriation risks, and the high uncertainty involved in research-oriented knowledge creation process requires high flexibility in partnerships, CJV is a better governance structure than EJV when an R&D JV focuses on research-oriented activities. Since academic institutions are usually less opportunistic partners, and the divergence in long-term objectives between academic institutions and MNEs increases the importance of flexibility considerations in partnerships, CJV is a better governance structure than EJV when the local partner is academic. Therefore, MNEs are less likely to adopt equity-based governance structure in an international R&D JV when it focuses on research-oriented activities or an academic local partner is chosen. Furthermore, since the cultural distance between the host and home countries of MNEs tends to increase EJVs' organizational costs substantially (Pothukuchi et al. 2002), it is likely to reduce MNEs' preference for EJVs and increase the likelihood of EJVs being replaced with CJVs when an R&D JV focuses on research-oriented activities or an academic local partner is chosen. Data on 319 international R&D JVs established in China during 1995-2002 largely support these arguments.
2 Theoretical Framework
2.1 The Governance Structure of R&D Joint Ventures
JVs are defined as organizational units created "... when two or more firms pool a portion of their resources within a common legal organization" (Kogut 1988, p. 228). They can take the form of either EJV or CJV. Whether to collaborate with local partners in R&D through an equity-based or a contract-based JV is an important decision, since the two entry modes represent different degrees of control, resource commitment, and risks (Anderson and Gatignon 1986; Hagedoorn 1993). EJVs are legally and administratively independent from the parent firms, but are similar to hierarchical organizational structures as the parents share control and profit (Williamson 1996). Transaction cost economics (TCE) suggests that due to the shared control and profit, the hierarchical structure provides a higher level of behavior control and better protection of the technological competencies within EJVs (Garcia-Canal et al. 2008; Hennart 1988). The knowledge-based view suggests that due to the formal structure and stable interaction between partners, EJVs facilitate knowledge sharing between partners, especially the tacit and uncodified knowledge (Kogut 1988), which further benefits collaborative knowledge creation (Jiang and Li 2009). However, the semi-independent status of EJVs at the same time leads to greater organizational costs and less flexibility (Kogut 1988; Porter 1987), greater risks of there being differing strategic objectives between partners (Dussauge and Garette 1999), and a higher failure rate in the long-run. Firms today are embedded in an environment where chaos, uncertainty and risk are pervasive (Koza et al. 2011). This makes adaptability and flexibility more critical for knowledge creation, and the drawbacks of EJVs more detrimental.
Like EJVs, CJVs are also separate organizational units that involve the sharing of resources and risks, and commitment from the parents. However, CJVs are more market-like compared with EJVs and do not involve equity sharing. The terms and conditions regarding the pattern of a CJV partner's contribution, profit distribution and management control are not based on equity investments of the partner, but the result of ex ante negotiations between partners (Wang 2007). Based on TCE, this reduces the protection of the technological competencies within CJVs due to lack of ex post profit-sharing arrangement and hierarchy-like behavioral control. However, according to resource-based perspective, CJVs reduce resource commitment and offer more flexibility in R&D investment, which is especially valuable in rapidly changing technological development (Hagedoom 1993, 2002; Harrigan 1988; Koza et al. 2011; Wang 2007). In recent years, CJVs have become popular among R&D JVs and also more prevalent in industry-academy collaborations (Kuittinen et al. 2009; Schmoch 1999).
To sum up, the choice between EJV and CJV structures in R&D JVs resembles the make-or-buy decision with regard to intellectual capital as innovation inputs and outcomes (Pakes and Griliches 1984). An EJV structure (closer to a "make" decision) partially internalizes the transaction, protecting proprietary intellectual inputs and...
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