Exploitation and Exploration in International Joint Ventures ...

Exploitation and Exploration in International Joint Ventures: Moderating Effects of Partner Control Imbalance and Product Similarity Jason Lu Jin, Kevin Zheng Zhou, and Yonggui Wang ABSTRACT International joint ventures (IJVs) need to exploit their existing resources as well as explore new capabilities to capture the potential in emerging markets. This study develops a contingent view, arguing that the efficacy of exploitation and exploration depends on the levels of control imbalance and product similarity between an IJV’s foreign and local partners. A sample of 198 IJVs in China reveals that partner control imbalance has a U-shaped moderating effect on the relationship between exploitation and IJV new product performance but has an inverted U-shaped moderating effect on the effectiveness of exploration. Exploitation relates more strongly to IJV new product performance when partner product similarity is high, whereas exploration has a stronger impact on IJV new product performance at low levels of partner product similarity. These findings provide novel insights for IJVs to better manage exploitation and exploration in their new product development. Keywords: exploitation, exploration, international joint venture, control imbalance, product similarity

o capture the rising opportunities in emerging markets, global marketers often form international joint ventures (IJVs) with local partners (Chen, Chen, and Zhou 2014). Typically, foreign partners provide advanced technologies and managerial experience, whereas local partners offer knowledge about customers and government relationships in the host market (Tsang, Nguyen, and Erramilli 2004). When IJVs use the shared resources and capabilities from foreign and local partners, a critical strategic choice arises: Should IJVs exploit the existing capabilities and refine existing products or, alternatively,

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Jason Lu Jin is a doctoral candidate, Faculty of Business and Economics, University of Hong Kong (e-mail: [email protected]). Kevin Zheng Zhou (corresponding author) is Professor of Strategy/International Business, Faculty of Business and Economics, University of Hong Kong (e-mail: [email protected]). Yonggui Wang is Professor of Marketing, School of Business, University of International Business and Economics (e-mail: [email protected]). The authors thank the JIM review team for their insightful comments and guidance. This study was supported by the General Research Fund from the Research Grants Council, Hong Kong SAR Government (Project no. HKU 17503014). Seigyoung Auh served as associate editor for this article.

20 Journal of International Marketing

explore new opportunities and develop new products for the emerging markets? For example, when Volkswagen Group (VW) and Shanghai automotive industry corporation (SAIC) established an IJV in China, they needed to decide whether to adapt existing models to the Chinese market or to develop new models for the market (Posth 2008). Thus, exploitation and exploration are highly relevant for IJVs’ new product development efforts to serve emerging markets (Cui, Walsh, and Zou 2014; Hortinha, Lages, and Lages 2011). Although IJV formation enables partners to share resources and decrease constraints, it also increases the dependence between foreign and local partners (Katila, Rosenberger, and Eisenhardt 2008). Because both foreign and local

Journal of International Marketing ©2016, American Marketing Association Vol. 24, No. 4, 2016, pp. 20–38 DOI: 10.1509/jim.15.0164 ISSN 1069-031X (print) 1547-7215 (electronic)

partners possess critical resources, they compete for power and control to reduce the constraints and dependencies with their exchange partners (Li, Zhou, and Zajac 2009). In the VW–SAIC case, SAIC depends on VW to obtain core technologies and develop its own vehicle models, whereas VW depends on SAIC’s government relations and local distribution channels to target the rapidly growing automobile market in China (Posth 2008). Because the dependent relationships between IJV partners influence resource exchange and allocation (Tsang, Nguyen, and Erramilli 2004), they carry important implications for the effective implementation of exploitation and exploration. Despite the importance of partner dependence for the efficacy of exploitation and exploration in IJVs, few studies have explicitly examined such relationship-level moderators (Junni et al. 2013). Prior studies have investigated marketlevel moderators, such as environmental dynamism (Jansen, Van Den Bosch, and Volberda 2006) and the nature of customers (Zhang, Wu, and Cui 2015), as well as firm-level moderators, including age and size (Voss and Voss 2013), market orientation (Kyriakopoulos and Moorman 2004), and previous experience (Hoang and Rothaermel 2010). However, how the relationship-level attributes (e.g., IJV partner dependence) shape the efficacy of exploitation and exploration has been underresearched (Junni et al. 2013). Building on the resource dependence theory (RDT) and exploitation–exploration framework, we investigate the roles of exploitation and exploration in IJVs and examine how partner dependence influences their impacts on IJV new product performance. We contend that whereas both exploitation and exploration relate positively to IJV new product performance and, consequently, IJV performance, their efficacy is conditional on the level of dependence between partners (i.e., control imbalance and product similarity). Because control imbalance speeds up decision making but inhibits information sharing, we argue that it strengthens the effect of exploitation but weakens the impact of exploration on new product performance. Furthermore, because product similarity facilitates resource integration yet limits resource diversity, we posit that it enhances the effect of exploitation but weakens the role of exploration. Our propositions are largely supported by the results of 198 IJVs in China. Our study contributes to the innovation literature by revealing how various forms of partner relationships differentially shape the value of exploitation and exploration. Despite the importance of interpartner management to IJV success, few studies have investigated how interpartner relationships moderate the efficacy of new product

development strategy. Our study thus complements previous research on exploitation and exploration, which has focused primarily on firm-level or market-level moderators (Mueller, Rosenbusch, and Bausch 2013). Our research underscores the crucial role of partner dependence in shaping the efficacy of exploitative and explorative strategies, which echoes the calls for examining relationshiplevel moderators of exploitation and exploration (Junni et al. 2013). Our findings show that various forms of partner relationships interact with exploitation and exploration in opposite ways and thus have differential implications on IJV new product performance. These results highlight the challenge of the joint pursuit of exploitation and exploration such that a combination of high exploitation and high exploration may not be optimal to achieve superior new product performance. Our study also extends the IJV and global marketing literature by providing a nuanced understanding of the dependent relationships between foreign and local partners. Prior IJV studies have highlighted how partner dependence affects strategic choices (e.g., IJV formation and termination; Casciaro and Piskorski 2005; Xia et al. 2014) and IJV performance (Pangarkar and Klein 2004; Yan and Gray 2001). Extending prior research, our study shows how partner dependence influences their resource exchange and sharing, which in turn moderates the effectiveness of exploitation and exploration. In addition, prior international marketing research has reported inconsistent effects of control imbalance and product similarity (Barden, Steensma, and Lyles 2005; Luo, Rindfleisch, and Tse 2007; Pangarkar and Klein 2004). Our research provides novel insights for the inconsistent findings by highlighting the match between partner relationships and innovation strategies in fostering new product performance.

THEORY AND HYPOTHESES Exploitation and Exploration New product innovation is critical to achieve sustainable competitive advantage and superior performance. March’s (1991) exploitation and exploration framework has greatly influenced strategic marketing and innovation research (Kyriakopoulos and Moorman 2004; Yalcinkaya, Calantone, and Griffith 2007). This framework classifies innovation strategy as exploitation and exploration. Exploitation emphasizes the use of existing resources and competencies to refine and extend existing products; it aims to maximize the benefits of existing resources by reducing the costs, improving the efficiency, and making incremental improvements (March 1991). Exploration

Exploitation and Exploration in IJVs 21

instead focuses on experimentation with new alternatives and generation of new knowledge to develop radically new products; it represents a proactive approach whereby firms attempt to be pioneers in new product-market domains (March 1991; Morgan and Berthon 2008). Although debate exists regarding whether exploitation and exploration are orthogonal or continuous (Gupta, Smith, and Shalley 2006), we follow the orthogonal camp, which argues that firms can engage in both exploitative and explorative activities (e.g., Atuahene-Gima and Murray 2007; Cui, Walsh, and Zou 2014; He and Wong 2004; Hortinha, Lages, and Lages 2011; Jansen, Van Den Bosch, and Volberda 2006). Exploitation and exploration differ in their strategic intents, processes, and levels of commitment and returns. First, exploitation focuses on satisfying the demands of existing markets by refining existing products, whereas exploration aims to serve new and potential markets by developing new products (March 1991). Second, exploitation requires convergent thinking to reduce variety, increase efficiency, and achieve continuous improvement along existing technological trajectories (Atuahene-Gima and Murray 2007). Conversely, exploration is rooted in variation-increasing, autonomous processes designed to experiment with new alternatives and foster novelty (March 1991). Third, by leveraging existing competences, exploitation requires limited resource commitments, but its returns are proximate and predictable. In contrast, exploration needs vast resource investments and extensive knowledge integration, but its returns are distant and highly uncertain (Cui, Walsh, and Zou 2014; He and Wong 2004). The successful implementation of exploitation and exploration hinges critically on resource allocation; without sufficient resources, firms cannot fulfill the requirements of exploitative and explorative activities (Cui, Walsh, and Zou 2014; Zhang, Di Benedetto, and Hoenig 2009). Thus, we contend that the factors influencing resource allocation set the boundary conditions of exploitation and exploration. The issue of resource allocation is particularly complex in IJVs, which involve two independent partners from different nations (Calantone and Zhao 2001; Chen, Chen, and Zhou 2014). Because foreign and local partners have distinct strategic considerations and cultural values (Dong, Zou, and Taylor 2008), their complex relationships likely affect resource investments and the efficacy of exploitation and exploration in IJVs.

Resource Dependence Theory Resource dependence theory (RDT) provides a suitable lens for analyzing the complex relationships between IJV


partners (Pfeffer and Salancik 1978). According to the RDT, organizations depend on various resources such as capital, raw material, and access to market, which are often possessed by other entities; thus, organizations should take various strategies to manage dependence and cope with external constraints (Casciaro and Piskorski 2005; Hillman, Withers, and Collins 2009). For IJVs in emerging markets, the foreign partner depends on the local partner to obtain government relationships, distribution channels, and customer knowledge, and the local partner needs the foreign partner for advanced managerial and technological knowledge (Sun and Lee 2013). Whereas mutual dependence increases the incentives for foreign and local partners to collaborate, IJV partners still face fundamental tensions as a result of their goal incongruence and cultural differences (Dong, Zou, and Taylor 2008; Li, Zhou, and Zajac 2009). Foreign and local partners join IJVs for different reasons and possess divergent strategic objectives and expectations about the IJV development (Steensma et al. 2008). They also differ widely in their managerial practices, norms, and values, such that they often have different understandings of and responses to required tasks, which could lead to potential conflicts (Chang, Bai, and Li 2015). As such, foreign and local partners often compete for decision-making power. Because competitive dependence influences partners’ willingness to contribute relevant resources and proprietary know-how (Casciaro and Piskorski 2005), it affects resource availability and allocation in IJVs. According to the RDT, power discretion and resource importance are two critical components of dependence and capture different aspects of the resource flow within IJVs (Pfeffer and Salancik 1978; Xia et al. 2014). Whereas power discretion suggests that one partner can exercise its power to constrain or foster the allocation and utilization of shared resources, resource importance highlights the relevance and relatedness of the resources controlled by the IJV partner (Xia et al. 2014). In the IJV setting, these two components are reflected by the extent to which (1) IJV partners have discretion over resource allocation and utilization (i.e., the control imbalance between foreign and local partners) and (2) IJV partners can utilize each other’s resources (i.e., the degree of product similarity). First, foreign and local partners compete for the decision-making power to control the IJV and ensure that its strategic activities fit their own agendas (Barden, Steensma, and Lyles, 2005). Accordingly, we define control imbalance as the relative influence exercised by the foreign partner over the local partner in terms of venture management (Choi and Beamish 2004; Steensma

and Lyles 2000). When the control power is imbalanced, partners in an unfavorable position likely act opportunistically to alleviate its dependency (Steensma and Lyles 2000), which reduces the information exchange between partners (Casciaro and Piskorski 2005). Second, product similarity, the extent to which the IJV partners overlap in their respective products, positioning, and technologies (Makri, Hitt, and Lane 2010; Zhang et al. 2010), reflects the resource relatedness and importance between foreign and local partners. When product similarity is high, it is relatively easier for one partner to absorb the resources contributed by the other, increasing its relative power and the possibility to take advantage of such resources (Yan and Gray 1994). Because each partner can understand and apply the other’s resources outside the relationship (Luo, Rindfleisch, and Tse 2007), product similarity enhances the likelihood that the IJV partner could appropriate the pooled resources for private interests and reduce its relative dependence (Xia et al. 2014). Main Effects of Exploitation and Exploration. Both exploitation and exploration should benefit IJV new product performance, or the extent to which the IJV achieves its new product development objectives, such as sales growth and profitability (Atuahene-Gima and Murray 2007; Zhang, Di Benedetto, and Hoenig 2009). By maximizing the value potential of the existing resources, exploitation ensures immediate and predictable returns (March 1991). Because it focuses on the use of existing resources, it delivers value to current customers through incremental modifications of existing products (Hortinha, Lages, and Lages 2011). Moreover, exploitation is less complicated to manage and provides a relatively low-risk approach to extend a joint venture’s operations (March 1991). Because exploitative activities entail small changes in technology and limited deviation from current product-market experiences, they can improve operational efficiency and reduce production costs (Voss and Voss 2013). Accordingly, IJVs can achieve better new product performance from economies of specification and scale. By developing novel products, exploration helps IJVs seek new market opportunities and build new competitive advantages (Jansen, Van Den Bosch, and Volberda 2006). This strategy promotes the integration of new insights and emergent ideas into new product designs, thereby fostering new products that totally differ from those of competitors (Atuahene-Gima and Murray 2007). It enables the firm to create a unique market position and shape the rules of competition. Although it is inherently risky and entails high levels of uncertainty, exploration potentially can generate

much higher returns (Zhou, Yim, and Tse 2005). In addition, because it stimulates the generation of valuable new knowledge combinations and novel competences, it reduces the risk of obsolescence and strengthens the sustainable competitive position (Leonard-Barton 1992), leading to superior new product performance. New product performance contributes to the overall performance of IJVs. New product success is the key to survive in the face of intensified competition and changing market environments (Atuahene-Gima and Murray 2007). Continuous new product introduction enables IJVs to stay ahead of competitors and effectively deal with the demand uncertainty in emerging markets (Langerak, Hultink, and Robben 2004). New product success creates unique brand image in the market, which can contribute significantly to overall performance. By providing customers with up-todate products and improved benefits, IJVs increase customer satisfaction (Zhou, Yim, and Tse 2005). Prior studies have confirmed a positive relationship between new product performance and firm performance (e.g., Langerak, Hultink, and Robben 2004). Thus, H1a: Exploitation is positively associated with IJV new product performance. H1b: Exploration is positively associated with IJV new product performance. H1c: IJV new product performance is positively associated with IJV performance.

Moderating Effect of Control Imbalance Prior research has mainly illustrated the drivers and performance implications of control imbalance (e.g., Calantone and Zhao 2001; Choi and Beamish 2004; Pangarkar and Klein 2004; Steensma et al. 2008). Dominant control seemingly offers mixed effects: asymmetric power supports decision making without excessive coordination costs; however, it also creates unfairness perceptions and conflict because the dominant partner can extract disproportionate returns and seek private benefits (Barden, Steensma, and Lyles 2005; Steensma and Lyles 2000). In this study, we take a foreign partner perspective and operationalize control imbalance as foreign partner control power minus local partner control power. We predict that imbalanced control is more desirable than shared control for implementing exploitation. When foreign partners hold the key decision power on various functional activities (i.e., positive control imbalance), they can make decisions


rapidly, which matches the efficiency requirement of exploitation and enables the IJV to concentrate on goalrelevant tasks. Dominant control also reduces the difficulties and conflicts associated with decision making and speeds up the implementation of exploitation (Li, Zhou, and Zajac 2009). Because dominant foreign partners can delineate clearly their roles, responsibilities, and collaboration routines (Jansen, Van Den Bosch, and Volberda 2006), IJVs can leverage existing technologies and knowhow efficiently. As control imbalance changes from positive to zero (i.e., neutral), foreign and local partners have equal control over the IJV. In such conditions, negotiations about the divisions of labor and outcomes are slow and difficult to reach consensus (Steensma and Lyles 2000). Cross-cultural differences between foreign and local partners further exacerbate the slow decision-making process because managerial attention is diverted to resolving partner disagreements (Barden, Steensma, and Lyles 2005). As a result, the efficiency of exploitation declines. When control imbalance shifts from neutral to negative, local partners have a dominant control. As major strategic and operational decisions are concentrated with the local partner, these decisions can be made quickly (Barden, Steensma, and Lyles 2005), which fits well with exploitation. In addition, because exploitation makes only incremental changes to existing products and is less complicated to manage (March 1991), local partners can utilize existing know-how and enumerate the tasks to support the implementation of exploitation. In summary, the effect of exploitation on new product performance becomes weaker when the level of control imbalance shifts from positive to zero but gets stronger when control imbalance changes from zero to negative. Thus, we predict that H2a: Control imbalance has a U-shaped moderation effect on the relationship between exploitation and IJV new product performance. In contrast, the effect of exploration on IJV new product performance may be stronger when control imbalance is neutral rather than positive or negative. When foreign partners dominate the decision making, local partners have lower propensity to share their specific knowledge about the local market (Choi and Beamish 2004; Pangarkar and Klein 2004). However, successful exploration depends on whether IJVs can incorporate unique resources and capabilities from both partners to generate fresh ideas (Li, Poppo, and Zhou 2010). When local partners are not willing to provide unique


insights, explorative efforts likely generate new product output that cannot meet the specific demands of local customers (Jansen, Van Den Bosch, and Volberda 2006). Moreover, when foreign partners impose operational routines and processes according to their own preferences, it provides less discretion and autonomy for local partners (Steensma et al. 2008). In turn, local partners lack opportunities to voice their opinions, which limits the diversity of mindsets and ideas for exploration; without the input of ideas pertaining to the local market, foreign partners face difficulties to think beyond existing framework and generate successful explorative output (Yalcinkaya, Calantone, and Griffith 2007). At the neutral level of control imbalance, the equal control structure cultivates an environment of mutual dependence, which motivates both partners to fully engage in IJV operations (Barden, Steensma, and Lyles 2005; Li, Zhou, and Zajac 2009). When both partners are willing to share information and insights, IJVs can integrate diverse knowledge and complementary resources to better support their explorative activities (Jansen, Van Den Bosch, and Volberda 2006). Equal control also improves perceived safety about resource commitment and helps partners gain confidence in their collaboration (Inkpen and Currall 2004). Thus, both partners have more opportunities to express their viewpoints in decision making, which encourages information exchange and facilitates the implementation of exploration. When local partners have dominant control, foreign partners have little discretion to voice their opinions (Steensma and Lyles 2000). Local partners can impose their preferences and mold IJV operations in line with their own interests (Casciaro and Piskorski 2005; Inkpen and Currall 2004). As a result, foreign partners are marginalized and likely behave opportunistically to rectify constrained decision-making authority and reduce dependence constraint (Steensma and Lyles 2000). Low engagement reduces foreign partners’ motivation to take initiatives to meet the demands of new product development. With less advanced technological knowledge contributed by foreign partners, IJVs engaging in exploration may not achieve desirable new product development objectives. Therefore, we propose that H2b: Control imbalance has an inverted U-shaped moderation effect on the relationship between exploration and IJV new product performance.

Moderating Effect of Product Similarity Product similarity between partners creates both opportunities and constraints for IJVs. When IJV partners overlap

significantly in their products and technologies, they can understand and acquire each other’s know-how readily, which enhances resource integration efficiency (Lane, Salk, and Lyles 2001). However, product similarity also heightens the tension between foreign and local partners; knowing the likelihood of potential knowledge leakage, partners may not be willing to share their proprietary knowledge so as to maintain their power relative to their partner (Luo, Rindfleisch, and Tse 2007; Xia et al. 2014). Therefore, IJV partners with high product similarity may confront the trade-off between enhanced efficiency and limited resource commitment. We posit that product similarity strengthens the positive link between exploitation and IJV new product performance. When product similarity is high, IJV partners can gain a deep understanding of current product and technological development from each other (Luo and Deng 2009). Because control over more resources reflects more power over the other partner (Xia et al. 2014), partners have the motivation to acquire and absorb each other’s knowhow. Furthermore, because product similarity reflects resource relatedness between foreign and local partners, it facilitates the integration of existing resources (Lane, Salk, and Lyles 2001). With better understanding, acquisition, and integration of existing know-how, IJVs can implement exploitation strategy effectively to refine current products. Conversely, if foreign and local partners operate in different product markets, partners are unfamiliar with each other’s technologies and know-how (Makri, Hitt, and Lane 2010). When they try to acquire, assimilate, and utilize their partner’s existing knowledge, they encounter cognitive burden because they need to devote significant time and efforts to becoming familiar with the other’s resources. These complex, nonredundant information exchanges delay exploitative tasks (Cui, Walsh, and Zou 2014). Thus, H3a: Product similarity has a positive moderating effect on the relationship between exploitation and IJV new product performance. The greater the similarity between IJV partners’ primary products, the stronger their capabilities to appropriate each other’s resources (Reuer, Klijn, and Lioukas 2014). The relative power and dependence might erode as the IJV partners internalize each other’s resources (Luo and Deng 2009; Yan and Gray 1994). Because resource appropriation makes the given partner stronger, both partners have incentives to withhold their proprietary know-how and focus on monitoring the other’s activities (Reuer, Klijn, and Lioukas 2014). Accordingly, conflicts of interest arise, which

reduces the partners’ willingness to share novel insights and complex resources (Casciaro and Piskorski 2005). Because of the lack of varied experiences and diverse sources of information, exploration will be unlikely to generate desirable innovative outcomes. Conversely, when the product similarity is low, partners cannot directly use the shared resources to increase their relative power (Makri, Hitt, and Lane 2010). Accordingly, they are more likely to contribute their specific knowledge and engage in the resource exchanges to complement each other’s strategic needs and manage environmental uncertainties (Luo and Deng 2009). Doing so creates opportunities to combine their critical resources and generate new perspectives to implement exploration successfully. Moreover, whereas product similarity enhances the efficiency of integrating existing resources, the resources exchanged among partners may be redundant and less diverse (Luo and Deng 2009). An IJV therefore confronts the risk of obtaining only homogeneous information and failing to think “outside the box” (Cui 2013). Accordingly, it is hindered in departing from current solutions and developing novel hypotheses. In contrast, product dissimilarity increases the heterogeneity of available resources and presents opportunities to develop new insights (Cui 2013). Partners with distinct backgrounds can introduce unique resources and provide previously unconnected information and knowledge, thus offering diverse resources for exploration to generate new variations. H3b: Product similarity has a negative moderating effect on the relationship between exploration and IJV new product performance.

METHODOLOGY Sampling and Data Collection To test the hypotheses, we conducted surveys of manufacturing IJVs in China. China is one of the largest recipients of foreign direct investment, most of which takes the form of IJVs (Chen, Chen, and Zhou 2014). In China, formal market institutions are not well-established, legal systems are underdeveloped, and unlawful or unethical business practices are widespread (Sheng, Zhou, and Li 2011). Because foreign firms cannot effectively deal with such institutional voids, they often form IJVs to enter China and adapt to local business situations (Chang, Bai, and Li 2015). This vast, dynamic, complex market forces foreign firms to leverage their existing products and know-how as well as explore and develop new products particularly for the Chinese market (Zhou and Li 2012). The unique institutional environments of China also prompt distinct


cultural and strategic views between local and foreign firms, creating a strong level of partner dependence (Li, Zhou, and Zajac 2009). Thus, it offers a rich context to study the interplay of exploitation/exploration and partner dependence in IJVs. Drawing on our literature review, we developed an original survey in English, translated it into Chinese, and then backtranslated it into English to ensure conceptual equivalence. We conducted in-depth interviews with 13 IJV senior managers and improved the survey design in accordance with their feedback. To reduce response fatigue and improve accuracy, we split the questionnaire into two parts and invited two senior managers from each firm to answer the questions in each part, respectively. One respondent addressed questions related to partner relationships, while the other respondent answered questions about exploitation/ exploration and IJV performance outcomes. We randomly selected 800 IJVs from a list provided by the National Bureau of Statistics of China. We restricted our sample to IJVs that comprised only one Chinese partner and one foreign partner. We recruited trained interviewers to conduct onsite interviews, which is a critical means of generating valid information and high-quality data in emerging economies (Hoskisson et al. 2000; Li, Poppo, and Zhou 2008). The interviewers made appointments with the managers, then visited them at their offices and collected the completed surveys. We successfully obtained paired responses from 198 firms (396 informants), for a response rate of 24.75%. We compared the responding and nonresponding firms in terms of age, size, and sales and found no significant differences. On average, the responding firms had 351.24 employees and 146.38 million RMB in sales, with an age of 13.43 years. Foreign partners came from Hong Kong, Taiwan, Canada, the United States, Europe, Japan, and other Asian countries. The sample covered various manufacturing sectors, such as electronics, pharmaceuticals, telecommunication, textiles and clothing, construction, and food processing. To verify the qualification of respondents, we collected information about their tenures and relevant knowledge. On average, the respondents had been with the company for 9.24 years, and their industry experience was 13.65 years. The mean value of their knowledge about the firm was 6.40 (on a 7-point scale). Thus, the respondents were knowledgeable informants.

Measures The measurement items for the focal variables appear in Table 1.


IJV Performance and New Product Performance. Consistent with prior innovation studies (Jansen, Van Den Bosch, and Volberda 2006; Zhou, Yim, and Tse 2005), we relied on key informants to provide the performance information. To measure IJV new product performance, we adapted the measure from Atuahene-Gima and Murray (2007) and Zhang, Di Benedetto, and Hoenig (2009), with three items that assess the extent to which the IJV achieved new product development objectives with respect to sales growth, profitability, and market share. We adapted the IJV performance scale from Ju, Zhao, and Wang (2014) and Pangarkar and Klein (2004), assessing the IJV’s overall performance relative to major competitors. Exploitation and Exploration. We adapted measures of exploitation and exploration from Morgan and Berthon (2008) to the new product development context. The fouritem scale of exploitation captures the extent to which the IJV improves the production process and reduces the costs of existing products; the four-item scale of exploration reflects the extent to which the IJV pursues a proactive product innovation strategy. These scales are also consistent with those used by He and Wong (2004) and Hortinha, Lages, and Lages (2011). Control Imbalance and Product Similarity. To measure control imbalance, we adapted the scale from Choi and Beamish (2004), Steensma et al. (2008), and Steensma and Lyles (2000). The IJV managers allocated 100 points between local and foreign parents to indicate their control in eight areas: (1) financing, (2) product technology, (3) process technology, (4) operations, (5) sales/ marketing, (6) management decisions, (7) administrative support, and (8) pricing decisions. We created a difference score as follows: Control imbalance = Foreign partner control − Local partner control. We adapted the product similarity scale from Makri, Hitt, and Lane (2010) and Zhang et al. (2010), with three items that assess the overlap between partners in terms of their products, technologies, and brand positioning. Controls. We controlled for several relevant variables. We controlled for IJV size, measured as the natural log of the number of employees (Chang, Bai, and Li 2015). We also included equity difference, measured as the difference between the equity share of the foreign partner and local partner in the IJV, because ownership is distinct from management control (Barden, Steensma, and Lyles 2005). We controlled for R&D strength with an item that assesses the relative strength of the firm’s research and development.

Table 1. Construct Measurement and Validity Assessment Construct IJV performance

Item The extent to which the IJV’s overall performance compares with major competitors on…

· · ·

IJV new product performance

Exploitation

Exploration

Product similarity

Market growth

Competitive intensity

SFL

Market share

.78

Profitability

.88

Return on investment

.90

The extent to which the IJV has achieved the following new product development objectives:

· · · · · · · · · · · · · · · · · · · ·

Sales growth relative to expected objectives

.78

Overall profitability relative to expected objectives

.86

Market share relative to expected objectives

.72

We decrease production costs by improving the processes.

.79

We reduce costs to customer through process improvements.

.81

We improve processes to reduce the time taken for production.

.78

We add the value of our products by improving the processes.

.81

We pursue a proactive/pioneering strategy.

.68

We adopt offensive rather than defensive product innovation strategy.

.76

Our products offer unique features not available from competitors’ offerings.

.81

Our products are highly innovative.

.82

There is some overlap between joint venture partners in terms of their respective products.

.86

There is some overlap between joint venture partners in terms of their brand positioning.

.72

There is some overlap between joint venture partners in terms of respective technologies.

.65

Our industry has very rapid growth in last year.

.94

Our industry has offered a great many of opportunities for fast development.

.89

The market demands in our industry grow rapidly.

.80

Competition in our industry is very intense.

.72

Any product that a company can offer, others can easily match.

.66

There are many competitors in our industry.

.74

CR

AVE

.89

.73

.83

.62

.87

.64

.85

.59

.79

.56

.91

.77

.75

.50

Notes: Overall model fit: c2(209) = 317.45, p < .01; confirmatory fit index = .95, incremental fit index = .95, root mean square error of approximation = .05. SFL = standardized factor loading; CR = composite reliability; AVE = average variance extracted. All the items are measured with seven-point Likert scales (for IJV performance and new product performance, 1 = “to a very little extent,” and 7 = “to a great extent”; for other constructs, 1 = “strongly disagree,” and 7 = “strongly agree”).

We also considered market growth (Im and Workman 2004) and competitive intensity (Jansen, Van Den Bosch, and Volberda 2006). The three market growth items evaluate the industry evolution and market attractiveness;

the three-item scale for competitive intensity assesses the degree of competition that a firm encounters in its industry. The IJV location matters because coastal and inland areas in China differ considerably in market demands,


technological development, and legal regimes. Thus, we created a dummy variable to measure location: 1 for coastal regions and 0 for inland regions. We also controlled for institutional and cultural differences between foreign and local partners. We measured institutional difference using the World Bank’s governance indicators: voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption (Kaufmann, Kraay, and Mastruzzi 2011), with the following formula: 2 6 IDij - IDiChina =Vi IDj = , 6 i=1

where IDj represents the institutional difference between country j and China, IDij captures the ith institutional indicator of country j, and IDiChina captures the ith institutional indicator of China. Vi is the variance of the ith institutional indicators across all the countries. We controlled for cultural distance, which refers to the cultural difference between the foreign partner’s home country and the host country, China. Cultural distance is calculated in line with Hofstede, Hofstede, and Minkov’s (2010) country scores, including five dimensions of national cultural individualism, masculinity, uncertainty avoidance, power distance, and long-term orientation: 2 5 CDij - CDiChina =Vi CDj = , 5 i=1

where CDj stands for the cultural distance of country j from China; CDij and CDiChina denote the index scores on cultural dimension i for country j and China, respectively; and Vi is the variance of the index for cultural dimension i. Table 2 displays the means, standard deviations, and correlations among all the variables.

and reliability. We assessed discriminant validity using Fornell and Larcker’s (1981) procedure. The square root of the AVE for each construct was much higher than all of the correlation coefficients between the latent variables. We also calculated the 95% confidence intervals of the correlation coefficients between any two constructs, and none of them included 1. Thus, our measures possess adequate discriminant validity.

Common Method Variance To deal with the potential threat of common method bias, we followed the recommendations of Podsakoff et al. (2003) in our ex ante survey design and ex post statistical tests. We collected data from two key informants: one manager answered questions related to partner dependence (i.e., control imbalance and product similarity), and the other manager responded to questions related to strategies and outcomes (i.e., exploitation and exploration, IJV new product performance, and IJV performance). To create psychological separation between the independent and dependent variables, we included them in different questionnaire sections. To reduce apprehension, we also assured respondents of the confidentiality of their responses and that there were no right or wrong answers. We also employed the partial correlation adjustment test of Lindell and Whitney (2011) to assess the threat of common method bias. We used legal inadequacy1 as a marker variable because it was theoretically unrelated to at least one of our latent constructs. Its lowest positive correlation with another construct served to adjust the correlations, such that we created a partial correlation–adjusted matrix (see Table 2). The comparison of the correlations before and after the adjustment showed that all of the previously significant correlations remained significant. Therefore, common method bias was unlikely to be a serious concern.

Construct Reliability and Validity We used Anderson and Gerbing’s (1988) approach to assess convergent validity and reliability. We ran a confirmatory factor analysis to check the psychometric properties of the multiple-item scales. In the measurement model, all the items loaded on their corresponding constructs (see Table 1). The measurement model fit the data satisfactorily (comparative fit index = .95; incremental fit index = .95; root mean square error of approximation = .05). All composite reliabilities were above the minimum threshold of .70, and all the average variances extracted (AVEs) were above .50. Thus, our measures demonstrated adequate convergent validity


ANALYSES AND RESULTS Our model contains interaction effects, so we employed a moderated regression analysis to test our hypotheses. We mean-centered the independent and moderating variables to generate the interaction terms (Aiken and West 1991). Initially, we included only the control variables (Model 1, Table 3), then added all the explanatory variables to test the main effects (Model 2) before including the relevant interaction terms (Model 3). We checked the variance inflation factors (VIFs) for each regression coefficient. The largest VIF was 3.60, well below the 10.0 benchmark, so


.09

.03 .20** .03 .21** .33** .08 −.01

6. Product similarity

7. IJV size

8. Equity difference

9. R&D strength

10. Market growth

11. Competitive intensity

.92

.94

5.62

−.03

.08

.07

−.04

.04

.21**

.19**

1.14

4.79

.14†

.03

.06

−.07

.14*

.27**

.22**

−.04

1.37

3.15

−.34 .44

.11

.12

.01

−.02

.05

.06

.18**

.11

.00

—

.26**

.09

−.02

.09

−.04

.06

.02

−.02

.01

−.05

.03

.60**

.05

.27**

—

−.05

.02

6

479.89

351.24

−.02

−.10

.04

−.05

.01

−.03

.04

−.03

.11

.45

−.14

1.32

4.51

−.02

.14† −.06

.08

−.01

−.07

.12† −.13†

.18** −.04

—

−.03 −.06

−.04

.03

.17*

.02

.21**

.18*

.15*

.20**

9

—

.10 −.04

—

.59**

−.05

−.10

−.10

.02

8

−.01

.04

.06

.02

.03

.19**

7

1.24

5.12

−.05

.03

.01

−.08

.12†

—

.17*

−.07

−.04

.05

−.06

.26**

.20**

.21**

.32**

10

1.05

5.19

.09

−.19**

−.03

−.12

—

.11

.11

−.05

.00

.04

.00

.13†

.03

.03

.07

11

*p < .05. **p < .01. Notes: N = 198. Zero-order correlations appear below the diagonal; adjusted correlations for potential common method variance are above the diagonal. MV = marker variable.

†p < .10.

.97

4.73

Mean

SD

.01 4.77

−.01

.02 −.02

14. Cultural distance

.14*

.22**

.16*

−.09

−.09

.10 .07

−.01 .03

.07

−.07

.04

.10

−.04

.40**

MV: Legal inadequacy

13. Institutional distance

.09

.04

.01

5. Control imbalance

12. Location

.06

—

.31**

4. Exploration

.37**

−.08

.36**

—

.11

3. Exploitation

.12

.39**

.11

—

.47**

.00

2. IJV new product performance

.30**

.10

.46**

5

—

4

1. IJV performance

3

2

1

Variables

Table 2. Basic Descriptive Statistics of the Constructs

.40

.19

.03

.23**

−.02

—

−.13†

−.09

−.08

−.14†

−.06

−.03

−.03

6.72

38.87

−.08

.03

—

−.03

−.04

.00

.07

−.02

.03

.00

.01

.05

−.08

2.25

2.14

.00

—

.02

.22**

−.20**

.02

.10

.13†

−.11

.11

.05

.02

.07

−.02 .06

.01 .13†

14 .08

13

−.05

.08

−.02

12

Table 3. Effects of Exploitation and Exploration on IJV New Product Performance DV: IJV New Product Performance Model 1 Variables IJV size

Model 2

Model 3

b

t

b

t

b

t

.04

.55

.02

.26

.00

−.01

−.05

−.65

.01

.05

−.00

−.04

R&D strength

.11

1.57

.06

.84

.08

1.13

Market growth

.21**

2.90

.21**

.23**

3.41


.01

.13

.02

.23

.03

.38

Location

.13†

1.83

.14*

2.04

.15*

2.14

Institutional distance

.13†

1.88

.12†

1.83

.14*

2.00

Equity difference

−.06

−.88

−.07

−.93

Control imbalance

−.08

−.87

−.08

−.81

Control imbalance squared

−.02

−.25

−.03

−.36

.07

1.02

.05

.72

−.06

−.90

−.19*

2.02

Cultural distance

−.05

−.64

3.11

Product similarity Exploitation Exploration

.35**

4.90

.47**

4.94

−.21*

2.14

Exploitation × Control imbalance squared

.24†

1.92

Exploration × Control imbalance

.17†

1.77

−.25*

−2.02

Exploitation × Control imbalance

Exploration × Control imbalance squared Exploitation × Product similarity

.25** −.13†

Exploration × Product similarity 2

R

ΔR

1.66

.10

.21 .11**

.06*

2.52*

3.76**

3.36**

2

F

2.94 .27

†p < .10. *p < .05. **p < .01. Notes: Two-tailed tests of significance. N = 198. DV = dependent variable.

multicollinearity did not appear to be a major concern for our study. The choices of exploitation and exploration strategies are likely driven by market forces (e.g., industry growth, competition intensity; Zhou, Yim, and Tse 2005). Therefore, we conducted a two-stage regression to alleviate this endogeneity concern. Following prior studies (Luo, Rindfleisch, and Tse 2007; Slotegraaf, Moorman, and Inman 2003), in the first stage, we regressed exploitation and exploration against market growth and competitive intensity, respectively,2 to obtain the residuals of exploitation and exploration, which are free of the influence of the


market environmental forces. In the second stage, we used the residual values of exploitation and exploration as the explanatory variables and generate the interaction terms in Models 2 and 3. As Table 3 indicates, exploration relates positively to IJV new product performance (Model 2: b = .35, p < .01), in support of H1b. However, exploitation has no significant effect on IJV new product performance (Model 2: b = −.06, n.s.), so we cannot confirm H1a. Because the Chinese market features high uncertainty and dramatic changes (Sheng, Zhou, and Li 2011), pursuing exploitation might not enable IJVs to capture market opportunities in this

Table 4. Effect of IJV New Product Performance on IJV Performance DV: IJV Performance Variables

b

t

IJV size

.19**

3.06

Equity difference

.11

1.37

R&D strength

.12†

1.87

Market growth

.24**

3.82


.04

.56

Location

.02

.36

Institutional distance

.03

.47

Cultural distance

.02

.23

Control imbalance

−.01

−.12

Control imbalance squared

−.06

−.81

Product similarity

−.05

−.75

Exploitation

−.03

−.38

Exploration

.07

1.03

IJV new product performance

.38**

5.52

R2

.35

F

6.82**

†p < .10. *p < .05. **p < .01. Notes: Two-tailed tests of significance. N = 198. DV = dependent variable.

highly dynamic business environment. Furthermore, Table 4 shows that IJV new product performance positively affects IJV performance (b = .38, p < .01), in support of H1c. Regarding the moderating effect of control imbalance, the interaction effect between exploitation and control imbalance is negative (Model 3: b = −.21, p < .05), and the interaction effect between exploitation and control imbalance squared is positive (Model 3: b = .24, p < .10). In contrast, the interaction between exploration and control imbalance is positive (Model 3: b = .17, p < .10), and the interaction between exploration and control imbalance squared is negative (Model 3: b = −.25, p < .05). Thus, control imbalance has a U-shaped moderation effect on the relationship between exploitation and IJV new product performance but an inverted U-shaped moderation effect on the relationship between exploration and IJV new product performance, in support of H2a and H2b.

We depicted the three-dimensional patterns of the interactions in Figure 1. As Panel A shows, the effect of exploitation on IJV new product performance shifts from positive (b = .42, p < .01; control imbalance = −1) to negative (b = −.27, p < .05; control imbalance = 0), and then to positive again (b = .44, p < .01; control imbalance = 1). In contrast, as Panel B shows, the effect of exploration on IJV new product performance shifts from negative (b = −.10; control imbalance = −1) to positive (b = .44, p < .01; control imbalance = .11), and then to negative again (b = −.39, p < .01; control imbalance = 1). These findings affirm H2. For the moderating effect of product similarity, the interaction between exploitation and product similarity is positive (Model 3: b = .25, p < .01), in support of H3a. As Figure 1, Panel C, indicates, the effect of exploitation on IJV new product performance shifts from negative (e.g., product similarity = 1, b = −.60, p < .01) to positive as product similarity increases (e.g., product similarity = 7; b = .55, p < .01). The interaction of exploration and product similarity is negative and marginally significant (Model 3: b = −.13, p < .10), providing partial support to H3b. As Panel D indicates, the effect of exploration on IJV new product performance shifts from high (e.g., product similarity = 1, b = .58, p < .01) to low as the product similarity increases (e.g., product similarity = 7, b = .09, n.s.). Regarding control variables, market growth has a positive and significant influence on IJV new product performance (b = .23, p < .01). In addition, IJVs located in coastal areas are more likely to have greater new product performance (b = .15, p < .05). Institutional distance has a positive and significant effect on IJV new product performance (b = .14, p < .05), suggesting that institutional difference enables IJVs to access diverse resources from foreign and local partners and enhances new product performance.

Post Hoc Analysis Exploitation or exploration are also likely endogenous to partner relationships. We performed additional analyses to address this concern. We ran two separate models using exploitation and exploration as the dependent variables with control imbalance and product similarity as the independent variables. The results show that neither control imbalance nor product similarity has significant effects on exploitation and exploration. We also ran additional analyses to examine the potential curvilinear effects of exploitation and exploration and their interaction effect on IJV new product performance. The results show that the square terms of exploitation and


Figure 1. Contingent Effects of Exploitation and Exploration

IJV New Product Performance

A: Interaction Between Exploitation and Control Imbalance (H2a) 7 6 5 4 3 2 1 .6 1 1.5 2 .2 2.5 3 3.5 -.2 4 4.5 5 5.5 -.6 6 6.5 Control Imbalance 7 -1 Exploitation

1

B: Interaction Between Exploration and Control Imbalance (H2b) IJV New Product Performance

7 6 5 4 3 2 1 .6 1 1.5 2 .2 2.5 3 3.5 -.2 4 4.5 5 5.5 -.6 6 6.5 7 -1 Control Imbalance Exploitation

1


C: Interaction Between Exploitation and Product Similarity (H3a) 7 6 5 4 3 2

7 5

1 1

1.5 2

2.5

3

3.5

4

3 4.5

5

5.5

Exploitation

6

6.5

1 Product 7 Similarity


D: Interaction Between Exploration and Product Similarity (H3b) 7 6 5 4 3 2

7 5 3

1 1 1.5 2

2.5

3

3.5

4

4.5

Exploitation


5

5.5

6

6.5

1

7

Product Similarity

exploration are not significantly related to IJV new product performance. Moreover, the interaction between exploitation and exploration is not significantly associated with IJV new product performance (b = .06, n.s.).

DISCUSSION Drawing on the exploitation/exploration framework and the RDT, this study examines how IJV partner dependence moderates the impacts of exploitation and exploration on IJV new product performance and, consequently, IJV performance. With a sample of 198 IJVs in China, we find that the effects of exploitation and exploration are contingent on control imbalance and product similarity between partners in distinct ways. Control imbalance has a U-shaped moderation effect on the relationship between exploitation and IJV new product performance but has an inverted U-shaped moderation effect on the role of exploration. Furthermore, exploitation is more effective at high levels of product similarity, whereas exploration works better at low levels of product similarity. These findings provide fresh insights into the interplay of exploitation/ exploration and partner relationships in IJV new product performance.

Theoretical Contributions Our findings contribute to the innovation and global marketing literature in several ways. First, this study adds to innovation research by developing a contingent view of exploitation and exploration from the viewpoint of relationship-level attributes. Prior studies have mainly investigated how market-level and firm-level factors influence the success of exploitation and exploration (Hortinha, Lages, and Lages 2011; Jansen, Van Den Bosch, and Volberda 2006; Kyriakopoulos and Moorman 2004). Extending prior research, we examine the moderating role of partner relationships between foreign and local partners (i.e., control imbalance and product similarity). Thus, we go beyond a simplified application of the exploitation/exploration framework to the IJV context to focus on the salient features of IJVs and identify partner relational variables as important contingent factors of exploitation and exploration. In particular, we find that the effects of exploitation and exploration are contingent on partner control imbalance and product similarity in opposite ways: exploitation (exploration) is most beneficial when control is imbalanced (balanced) or product similarity is high (low). These findings provide the following fresh insights on exploitation/ exploration literature: (1) IJVs must examine their partner

relationships carefully when they experience difficulty in implementing exploitation and exploration activities and (2) the inherent tensions between exploitation and exploration may be difficult to manage for IJVs such that no partner relationships could optimize the joint pursuit of high exploitation and exploration.3 Whereas previous literature has stated that companies can attempt both high exploitation and high exploration to achieve sustainable advantage in the context of independent firms (He and Wong 2004; Junni et al. 2013), our findings instead suggest the challenge of such an ambidextrous approach in IJVs, which involve foreign and local partners. Second, our findings provide novel insights on the role of partner relationships in the IJV and international marketing literature. Partner relationships determine resource allocation and utilization in IJVs, so they unavoidably affect the implementation of exploitation and exploration. Whereas prior research has examined the direct effects of partner relationships on knowledge acquisition and creation (Zhang et al. 2010), IJV instability and termination (Barden, Steensma, and Lyles 2005; Yan and Gray 1994), and IJV performance (Pangarkar and Klein 2004; Steensma and Lyles 2000), we highlight their role in moderating the efficacy of exploitation and exploration strategies. In particular, partner control imbalance has been an important subject in the international marketing and IJV literature (Calantone and Zhao 2001, Chen, Chen, and Zhou 2014, Pangarkar and Klein 2004). Previous literature has highlighted the model, scope, and exercise mechanisms of control, drawing on transaction cost theory and bargaining power theory (Calantone and Zhao 2001; Dong, Zou, and Taylor 2008). Our results complement and extend prior research by showing how a partner control imbalance influences the effectiveness of the product innovation strategy (Chen, Chen, and Zhou 2014). Furthermore, prior research has suggested that control imbalance is a double-edged sword (Barden, Steensma, and Lyles 2005; Pangarkar and Klein 2004). We develop a more nuanced approach to consider its curvilinear moderating role (Figure 1, Panels A and B). With high control imbalance, the dominant foreign or local partners can make decisions quickly, thereby improving the implementation of exploitation. However, the high control imbalance also limits the engagement of IJV partners and thus decreases the diversity of resource contributions and undermines the efficacy of exploration. With balanced control, both partners have mutual dependence and can provide better support and diverse resources for the implementation of exploration in IJVs. Thus, our findings provide novel insights to explain the double-edged effect of partner control imbalance.


Previous marketing literature has recognized the benefits and costs of product similarity (Cui 2013; Luo and Deng 2009; Luo, Rindfleisch, and Tse 2007; Zhang et al. 2010). Extending prior research, we focus on the moderating role of product similarity on the effectiveness of exploitation and exploration. That is, product similarity enhances the effect of exploitation but weakens the effect of exploration (Figure 1, Panels C and D). Furthermore, some recent research has shown that the strategic fit between the host–home country similarity and exploitation–exploration strategy increases small and medium-sized enterprises’ global market performance (Cui, Walsh, and Zou 2014). Extending this line of research, our findings show how the strategic fit between partner product similarity and exploitation/exploration strategies enhances IJV new product performance and, consequently, IJV overall performance.

Managerial Implications Our findings offer valuable insights for global marketers and IJV managers in China on how to enhance IJV new product performance. First, IJVs should be cautious in their strategic choices in new product development. Exploiting existing knowledge alone cannot enable IJVs to achieve superior new product performance in China, a market that features rapid changes and high uncertainties. Rather, IJVs should proactively leverage the critical resources from foreign and local partners to develop new expertise and novel products with advanced features to fit the demand in the Chinese market. For example, the failure of Whirlpool Narcissus, the IJV formed by Shanghai Narcissus Electric Appliances and Whirlpool, was attributed to its failure to adapt existing products to the Chinese market (Irvine 2001). As a result, Whirlpool had to buy out its partner and redesign a new machine from scratch to build its position in China (Inkpen and Ramaswamy 2006). In contrast, Denza, an IJV formed by Daimler and BYD Auto, shaped the market competition in China by developing an innovative vehicle for this market (Mitchell 2014). Second, IJV managers in China should understand that the success of exploitation and exploration is conditional on the dependent relationships between foreign and local partners. They need to consider the level of competitive dependence between foreign and local partners so as to facilitate the success of exploitation and exploration and achieve desirable innovative outcomes. In particular, when IJV partners share their decision-making influence and have a more balanced control over the IJVs, the choice of exploration rather than exploitation could generate more beneficial outcomes. In contrast, if one partner, either foreign or local, has control over the IJV, exploitation, but not exploration, is more


desirable for enhancing IJV new product performance. Thus, IJV managers should align their innovation strategies with the relative influence between foreign and local partners. Third, IJV managers in China should match their innovation strategies with product similarity between foreign and local partners. If a high level of similarity exists between foreign and local partners with respect to product, technology, and brand positioning, exploitation is a desirable choice that can lead to better new product performance. However, managers should engage less in the pursuit of exploration because both partners have the incentives to internalize each other’s resources and limit the access to their proprietary know-how. In contrast, if foreign and local partners do not have much product overlap, managers should be more prone to engaging in exploration strategy rather than exploitation strategy to enhance IJV new product performance. Fourth, IJV managers in China need to understand the inherent tensions of pursuing both high exploitation and exploration and that such a combination may backfire under certain conditions. For example, when foreign and local partners have balanced control, IJVs should embrace more exploration but less exploitation (see Figure 1, Panels A and B). In contrast, when one partner dominates the IJV, managers should engage in more exploitation but less exploration. Rather than following conventional wisdom, which promotes an ambidextrous approach (i.e., high exploitation and high exploration), IJV managers in China should consider combining high exploration with low exploitation (or vice versa) to attain superior new product performance under certain levels of partner relationships.

Limitations and Further Research Our study is subject to several limitations, which create avenues for further research. First, the cross-sectional design prevents us from testing causal inferences, but superior new product performance may affect IJVs’ decisions to engage in exploitation or exploration, and the complex relationships between foreign and local partners likely evolve over time (Hillman, Withers, and Collins, 2009). Moreover, our twostage estimation only teases out the influence of market forces (Luo, Rindfleisch, and Tse 2007; Slotegraaf, Moorman, and Inman 2003), yet a rigorous test of endogeneity requires strong instruments that affect exploitation/exploration but not performance. Further research could select appropriate instrumental variables and take a longitudinal research design to examine these causal and dynamic relationships. Second, our measures rely on subjective responses provided by two managers in each IJV. Additional research

should employ objective measures and collect data from multiple sources. Furthermore, our sample is limited to IJVs with only two partners. International joint ventures can have three or more partners, and IJVs themselves may have independent control rights, which increase the complexity of partner relationships. Additional research could consider the triadic dependence or even more complex relationships.

highlighted the difficulties of balancing exploitation and exploration (Lavie, Kang, and Rosenkopf 2011). Thus, additional research is encouraged to examine the benefits and challenges of implementing an ambidexterity strategy in various partner relationships.

Third, the generalizability of our findings is limited by our sample of IJVs in China because China possesses many unique cultural and institutional features. However, because partner relationships are salient features of IJVs, it is critical to corroborate our findings in other emerging markets. Further research could also collect data from both emerging and developed countries and examine the implications for alternative innovation strategies.

1. Legal inadequacy refers to the extent to which the local legal system cannot provide IJVs with sufficient protection for their business interests and intellectual property rights (Child, Chung, and Davies 2003). We used a four-item scale adopted from Child, Chung, and Davies (2003): (1) “The Chinese legal system cannot protect our interests,” (2) “The Chinese legal system cannot effectively protect our intellectual property rights,” (3) “The Chinese legal system cannot ensure customer firms pay,” and (4) “The business laws ineffectively protect our firm from attack by unfair competitive practices in the industry” (Cronbach’s a = .89).

Fourth, drawing on the RDT, we incorporate the dependence relationships between foreign and local partners into the framework of exploitation and exploration. Yet there are many other relationship-level factors, such as cooperation and control (Chen, Chen, and Zhou 2014), as well as intrafirm relationships between different functional units (Mueller, Rosenbusch, and Bausch 2013). International marketing research could examine the influence of such relational factors to continue this line of inquiry. Fifth, some researchers have suggested that the IJV control system is more complex, shifting from a continuum between one-partner dominance and shared control to split control across IJV functions (Chen, Park, and Newburry 2009; Choi and Beamish 2004). Split control differs from shared control in that partners administrate those functions they are skilled in rather than both partners sharing management responsibility for all functions (Choi and Beamish 2004). Finally, ownership of exploitation strategy matters. Exploitation may be more effective if the partner who contributes know-how dominates control. However, our data do not have information about which partner launches and leads the exploitation strategy. Future studies could collect more detailed information about innovation strategies and processes. Furthermore, our conceptualization and measurement of exploitation and exploration focus on new product activities. Future studies can expand to a broader conceptualization (e.g., learning and design, knowledge search and creation). In addition, emerging research has suggested that firms should be ambidextrous and engage in the joint pursuit of exploitation and exploration (Cui, Walsh, and Zou 2014); alternatively, some researchers have

NOTES

2. The stage 1 regression results show that market growth relates positively to exploitation (b = .20, p < .01) and exploration (b = .26, p < .01) and that competition intensity has no significant effect on exploitation (b = .02, n.s.) but has a positive effect on exploration (b = .11, p < .05). These results justify the use of a two-stage model. 3. We thank an anonymous reviewer for suggesting these two insightful points.

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