JIBS 1987 Equity Joint Ventures and the Theory of the Multinational Enterprise

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BUSINESS JOURNAL INTERNATIONAL OF SUMMER 1987 STUDIES,
withinthe framework cost In provided the transactions paradigm.1 the next by of are the This section, mainfeatures internalization theory reviewed. is followed of by a discussion how the theorycan be extendedto joint ventures using cost In the final the transactions paradigm developed Williamson by (1975). sectionempirical evidence someof the predictions thisexpanded supporting of notionof internalization will theory be examined.
Joint venturesare the dominantform of businessorganization multinational for enterprisesin the developing countries (Vaupel and Curhan 1973), and are frequentlybeing used by Fortune 500 companies in the developed countries (Janger1980; Harrigan1985). In fact, for U.S.-basedcompanies,all cooperative arrangements (involvingsuch thingsas licencesor local shareholders) outnumber wholly owned subsidiaries a ratioof 4 to 1 (Contractor Lorange1987). and by MNEs often preferjoint ventures over wholly owned subsidiariesregardless of whether or not they are requiredby a host country as a condition of entry (Beamish 1984). Nevertheless,fairly limited considerationhas been given to the rationale equityjoint ventures the theoryof the multinational in for enterprise. While recenttheoretical contributions utilizingthe internalization approachhave advancedour understanding MNEs (Buckleyand Casson 1976; significantly of Casson, 1979, 1982; Rugman 1979), the theory offersonly partialexplanations of the ownershippreferences MNEs for other than wholly owned subsidiaries of (Davidson and McFetridge1985; Teece 1985; Thorelli 1986; Horstmannand Markussen1986; Wells 1973). The purpose of this paper is to furtherextend the internalization approach providing economicrationale joint ventures an by for
AND THETHEORYOF EQUITYJOINTVENTURES THE MULTINATIONAL ENTERPRISE Paul W. Beamish* University Western of Ontario John C. Banks** Wilfrid LaurierUniversity Abstract.This paper extends the internalization approachto the theoryof the multinational enterprise (MNE)to includean expanded role for equityjoint ing the transaction cost paradigm of Williamson, paperexplainswhyjointventures this maysometimes be preferredover wholly owned subsidiaries.Also presentedis in empirical workonjoint-venture countries performance developing whichdemonstrates undercertainconditions that joint venturescan be the optimalmodeof foreigndirectinvestment.
Received:November 1985; Revised:August& November 1986; Accepted:December 1986.
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* W. Beamish Assistant is Professor Business of PolicyandInternational Business at the University WesternOntario.He receivedhis Ph.D. degreein Business of Administration Western, was winnerof the Barry Richman from and M. Dissertation in Award International Management theAcademy Management for of (1986). ** John C. Banksis Assistant Professor Business of Policyand International Business at Wilfrid in Laurier University Waterloo, Ontario a Ph.D.candidate International and in Business YorkUniversity at (Canada).
THETHEORY INTERNALIZATION OF
Internalization to an theorywas developed provide economic rationale the for existenceof MNEs.By definition these firmsestablish local operations a as of means serving foreign a in market rather engaging arms-length than transactions with market The intermediaries. theorypositsthatdue to the transaction costs which mustbe borneas a resultof conducting in business imperfect markets it is moreefficient for (lessexpensive) the firmto use internal structures rather thanmarket to intermediariesservea foreign market. to According Williamson's (1975) reasoning these marketimperfections arise from two environmental conditions: and uncertainty a small numberof marketagents.When these conditions coexistwith two sets of humanfactors, opportunism bounded and he rationality, arguesthatthe costsof writing, and executing enforcing armsclaims length complex contracts market contingent with intermediaries greater are than the costs of internalizing market.2 otherwords,a firm facinga In the complex, unpredictable business environment havingfew potential and channel members utilize to wouldbe moreprofitable the performing distribution function itself (i) there a strong if: was likelihood market agents wouldtryto takeadvantage of thefirm's of complete lack knowledge; (ii) thefirmwasunable specify and to all possible future transaction contingencies. in Researchers international business have been very successful providing in an economic for rationale theestablishment a MNEas a response imperfect of to markets utilizing transactions logic(Buckley Casson1976;Caves1982; cost and Dunning1981;Hennart 1982;Rugman 1981;Teece 1981, 1985).In extending thislogicto international markets havefound useful distinguish it they to between of strategies vertical and integration horizontal diversification the nature since of the marketfailures different each situation. in is The economicreasoning the in of supporting internalization markets the case of verticalintegration is concerned with the failureof markets intermediate in goods. In the case of horizontal diversification concern withthe failure markets intangible the is of in assetsfor such thingsas management know-how,tradename or proprietory technology. the and Although elegance comprehensiveness transactions of cost reasoning providedthe internalization has approach with a powerfullogic (Rugman1980, 1985),it is still deficient some respects a general in as theory of the MNE.In our view the majorlimitation thatthe theoryin its current is formfocusesprimarily one modeof hierarchy organization. therefore on or It provides firm with only one fully developed the solutionto the problemof imperfect international markets-theestablishment a whollyownedsubsidiary of and (WOS). Yet, both conceptually practically, thereare a number other of modeswhichfirms anddo adoptto dealwithimperfections international can in markets including licensing, management contracts, subcontracting, ventures joint