Revisiting the trustworthiness-performance-governance nexus in international joint ventures.

VerfasserHsieh, Linda H.Y.

Abstract This paper contributes to the research on international joint ventures (IJV) in the following ways: (1) by identifying different patterns of governance that partners in the post-formation period exercise and examining how contrasting patterns relate to variations in perceived partner's trustworthiness, as well as to IJV performance; (2) by empirically testing the extent to which partners emphasize or even renegotiate and change different elements of governance; and (3) by complementing existing studies that have examined only unidirectional links among trustworthiness, performance and governance by considering possible simultaneous relationships that may exist among these variables. The findings from a survey and follow-up interviews with international joint ventures located in Taiwan reveal that levels of partners' trustworthiness and performance satisfaction each, by itself, may lead to the deployment of different governance measures. However, it is the combinations of extreme (high or low) variants on both partners' trustworthiness and performance satisfaction that seem to generate clearer patterns of governance. Low satisfaction and partners' trustworthiness seem to encourage intensification of control or the deployment of more aggressive governance measures. In contrast, high performance satisfaction and partners' trustworthiness may foster a combination of soft and routine forms of control.

Keywords International joint ventures * Inter-organizational relationships * Perceived trustworthiness ? Performance satisfaction * Governance

1 Introduction

Managing an international joint venture (IJV) can be more complex than managing a unitary organization because of the challenges of cooperation and coordination between partners in achieving jointly agreed strategic objectives (Beamish and Lupton 2009; Gulati et al. 2012). While there is extensive literature on the antecedents and outcomes of IJVs (see reviews by Nippa and Beechler 2013; Ren et al. 2009; Reus and Ritchie 2004), there seems to be no consensus on the nexus of trustworthiness-performance-govemance (Vlaar et al. 2007). First, there is mixed empirical evidence on the link between partition of governance and performance. Some have reported a positive relationship between dominant partner control and IJV performance (e.g., Mjoen and Tallman 1997), whereas others have reported a negative relationship (e.g., Beamish 1985) and suggested shared control by partners (Yan and Gray 1994) or split control (Choi and Beamish 2004). Others have found no relationship (e.g., Luo and Tan 2003). Some IJV scholars adopt a contingency perspective and examine factors such as trust, which has been found to moderate the relationship between IJV control and performance (Fryxell et al. 2002). Second, there has been an ongoing debate about the adequacy of trust as an organizing principle and whether it should be combined with formal control (Luo 2002). In addition, it is not clear whether increasing formal control actually hampers initiatives in trust building (Inkpen and Currall 2004; Malhotra and Mumighan 2002; Puranam and Vanneste 2009). Third, empirical findings on the trust-performance link remain inconclusive. Some (e.g., Boersma et al. 2003) have suggested that trust-based relations are significant for performance, whereas others (e.g., Aulakh et al. 1996) have reported no direct link between trust and performance. These diverse arguments prompt a need for more research to explore if and how trust and control influence each other, as well as performance (Brouthers and Bamossy 2006).

Moreover, in comparison to the voluminous studies on IJV formation and some research of IJV exit/termination, we have only a rudimentary understanding of renegotiation, adaptation and change of governance during the post-formation stage of IJVs. The research on post-formation governance in IJVs (e.g., Brouthers and Bamossy 2006; Chung and Beamish 2010, 2012; Hsieh et al. 2010; Makino et al. 2007) mainly argues that managing relational and performance issues that arise in the post-formation period by renegotiating and adjusting governance is essential to avoid 'unintended termination'. However, the attempt to renegotiate certain elements in IJV governance, such as ownership structure, may increase transaction and agency costs and foster inter-partner politics (Chung and Beamish 2010). This debate points to the need for better understanding of which aspects of governance renegotiation partners should prioritize in a given scenario and the consequences of their approaches to renegotiation on subsequent collaboration.

Drawing on the organizational control literature, the present study defines governance as a combination of different IJV control mechanisms that seek to reduce risk to the owners and ensure that the IJV activities bring an acceptable long-term return. Reuer et al. (2002) suggested renegotiation as an instrument of post-formation governance to cope with ex-post contingencies and gaps in initial arrangements. Together with output, behavioral and social controls (Chen et al. 2009; Ouchi 1979; Sitkin et al. 2010), these governance elements provide the basis for cooperation and coordination between IJV partners. Our interest in this paper is in understanding how partners perceive the overall trustworthiness of one another. As such, we used the term perceived partner's trustworthiness to refer to trustors' subjective construal and judgment of trustees' competence, benevolence, and integrity (Chen et al. 2011; Mayer et al. 1995). Trustworthiness differs conceptually from governance in that the latter is an act of coordination and control that supports the implementation and operation of an IJV (Chen et al. 2009; Yan and Gray 2001). Performance relates to both 'system' and 'goal' perspectives (see Child and Yan 2003).

The main contribution of this paper to the IJV literature is twofold. First, we complement existing studies that have only examined unidirectional links among trustworthiness, performance and governance by considering possible simultaneous relationships among these variables. Second, we address empirically the following questions:

  1. How do trustworthiness, performance and governance relate to each other?

  2. What patterns of governance do focal firms exercise in the post-formation period of IJVs and how do contrasting patterns of governance relate to variations in perceived partner's trustworthiness, as well as IJV performance?

  3. To what extent do partners emphasize or even renegotiate and change different elements of governance?

The organization of this paper is as follows. First, we review the likely association among perceived partner's trustworthiness, performance and governance. Next, we describe our multi-method design that involves two data sources. The first was an initial survey to gain an overview of the issues facing foreign partners in IJVs located in Taiwan and to identify the control mechanisms used by them in the post-formation stage. We conducted follow-up interviews with some IJVs for additional understanding of the survey results. Finally, we present and discuss the findings of simultaneous tests and interviews. Then, we draw conclusions and indicate the research implications.

2 Research of Trustworthiness-Performance-Governance in IJVs

2.1 The Trustworthiness-Governance Relationship

The level of trustworthiness that partners perceive in their counterparts usually manifests itself in how they organize and govern their cooperation (Mollering 2002). Transaction cost theory emphasizes the use of ex-ante governance as a framework to guide the development of cooperation in IJVs. This includes contractual safeguards, defining partners' responsibilities, the composition of the IJV board, and appointing the management (Child and Yan 1999; Luo 2002). In particular, when collaborating with partners lacking favorable reputation, ex-ante governance is a crucial instrument in specifying and ensuring the trustworthiness of counterparts (Schilke and Cook 2013a).

During the life of an IJV, opportunities may arise for partners to prove that they are trustworthy (Parkhe 1993a). Agency theory (Inkpen and Currall 1998; Nielsen 2011; Nippa et al. 2007; Sengun and Wasti 2007) suggests that a high level of perceived partner's trustworthiness may encourage a gradual relaxation of formal control measures. In contrast, a low level of perceived partner's trustworthiness is likely to encourage trustors to rigidly enforce existing formal controls and/or modify governance. The latter may involve a process of renegotiation and reorganization (Dirks et al. 2009; Faems et al. 2008; Reuer et al. 2002). There are two main types of formal control: Behavior control and output control (Ouchi 1979; Das and Teng 2001). Behavior control seeks to turn appropriate behavior into desirable output by monitoring, whereas output control involves the close monitoring of performance outcomes. Ex post renegotiation and reorganization can lead to formalizing monitoring processes and specific reporting guidelines, including additional contractual clauses to specify penalties for future transgressions, and changing board members (Arino and Reuer 2004). Whether increasing formal control is effective in addressing trust problems continues to be unclear. Many firms consider contract revision to be a last resort. It can be difficult to enforce contracts in markets where legal institutions are not well established (Zhou and Xu 2012). Earlier studies based on social exchange theory suggest that relational governance by trust building could be an alternative organizing principle that complements a formal contract and encourages cooperative behavior (e.g., McEvily et al. 2003; Poppo and Zenger 2002; Zaheer and Venkatraman 1995). For instance, participatory decision making can be implemented as a less formal alternative. This helps to create a sense of transparency between partners and...

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