THE CONTROL OF INTERNATIONAL EQUITY JOINT VENTURES ...

THE CONTROL OF INTERNATIONAL EQUITY JOINT VENTURES

Distribution of capital and expatriation policies Jacques Jaussaud, Johannes Schaaper and Zhong-yu Zhang*

Abstract Our research focuses on two main instruments of control over international joint ventures: the distribution of capital between partners and the expatriation policies of managers. Various studies show that the distribution of capital differs according to the degree of development of the host countr y. Using systematic random pulling of 323 international examples in the 1999 directory of the subsidiary companies of Japanese rms world-wide, we subject this assumption to empirical checking. On the issue of expatriation policy, our research aims to validate the general model of Perlmutter (1969, 1974) enriched by Edström and Galbraith (1977). Keywords International joint ventures, distribution of capital, expatriation policies, Perlmutter’s model, statistical analysis.

INTRODUCTION Creating equity joint ventures with local partners is one of the modes of international development that rms use in both developed and developing countries (Beamish 1992; Hennart 1988). In equity joint ventures at least two rms share their resources within a legal framework. When partners have different nationalities we talk of international equity joint venture. Seeking to reinforce its presence in a speci c country, a company may set up an international equity joint venture to take advantage of the local partner’s access to local resources, distribution networks and other networks of in uence. Both foreign and local partners can bene t: the foreign company can overcome barriers that hinder its progression in an overseas location ( Jaussaud 1991) and the local partner can gain from access to the nancial and technological resources and management expertise of its foreign partner and, in some cases, to some of the foreign partner’s markets.

Journal of the Asia Pacic Economy 6(2) 2001: 212–231 © 2001 Taylor & Francis Ltd ISSN 1354–7860 print/ISSN 1469–9648 online DOI: 10.1080/13547860120059720

CO NTRO L OF IN TERN ATION AL EQUITY JO INT VENTURES

Control of international joint ventures is both complex and crucial. It involves the dif culties related to geographical and cultural distance as well as to the very nature of joint ventures, a hybrid structure created by various partners (Desreumaux 1994; Kumar and Seth 1998). Recent literature, which we review in the rst part of this article, insists on diversity of the instruments of control over international equity joint ventures. Several studies concerning these control instruments note how the distribution of capital between partners offers different pro les according to the degree of development of the host country (Beamish 1985, 1992). As far as we can determine, this thesis has not been the subject of recent empirical veri cation. However, our recent investigation of French joint ventures in China and Japan appear to contradict this idea ( Jaussaud 1991, 1998; Zhang 1998; Jaussaud and Zhang 2000). Our ndings on these French examples are therefore the starting point of this study. Because we have few examples of French joint ventures in China and Japan, to strengthen the validity of our ndings we have examined equity joint ventures created by Japanese rms world-wide, using reliable statistical sources that are readily available for the Japanese joint ventures (To¯yo¯ Keizai 1999). We begin with theoretical discussion of the diverse instruments of control over international joint ventures and the stakes that these involve. Speci cally we consider the distribution of capital between partners and expatriation policies. We then turn to empirical investigation of Japanese joint ventures across the world to illustrate our conclusions on the control of international joint ventures. INSTRUMENTS OF CO NTRO L OF INTERNATIONAL EQ UITY JOINT VENTURES AND THE STAKES INVOLVED To understand control of international joint ventures we begin by considering the objectives that partners pursue when they create a joint venture. A variety of theoretical approaches in management literature offers useful insight. Objectives of the partners and the stakes involved in control The question of why companies create equity joint ventures has challenged many authors. Different theoretical approaches include transaction cost theor y exploring strategic behaviour and organizational learning (Kogut 1988), and agency theor y that concerns the base of resources (Kumar and Seth 1998). Taking the transaction cost approach, Hennart (1988) lists the arguments advanced most often to explain the creation of joint ventures: rms are looking for economies of scale in production, the globalization of markets requires rms to set up subsidiaries world-wide in short periods of time, rms need to share knowledge with local actors and reduce political 213

J. JAUS SAUD, J . S CH AAPER AND ZH ON G-Y U Z HANG

risk in overseas operations. Hennart claims that any of these constitute a good reason for setting up international joint ventures. However, as alternative solutions are possible in each case, none of these reasons is suf cient alone to explain why rms want to create an international joint venture. Why would economies of scale not be reached using independent suppliers? Why could knowledge not be shared within the legal framework of licensing agreements? Creating an equity joint venture is, in fact, a particular form of internalization. It results from the choice to resort to hierarchical – even shared – control rather than to the market. Thus, reference to transaction cost theory is not surprising here. Hennart stresses that when speci c assets are engaged by at least one of the partners, or when transferred know-how is not completely protected by patents because it is partly founded on tacit knowledge for example, the alternative solutions are no more suitable than a joint venture while the project involves risk of opportunism. The equity joint venture is particularly well suited to cases where economic performance is dif cult to measure or is uncertain. This is frequently the case in an international context, for example where the cooperation involves speci c assets or tacit know-how transfer (Kogut 1988). The structure of an equity joint venture offers an elaborate way to manage the international relationship. It provides a strong incentive to reveal information and to share knowhow, since each partner is remunerated in line with results that are obtained jointly. Control of the joint venture must cope not only with performance, but also with the means and the processes involved, about which each partner has only partial information. The organizational learning approach also offers some insights into the stakes involved in controlling international joint ventures. This approach considers joint ventures as a means by which one partner seeks to acquire knowledge and know-how that the other partner wants other local companies not to gain access to it. The organizational learning approach perceives a rm as a base of competences, which is retained inside the company. The joint venture consequently becomes a means of transferring competences, in particular tacit knowledge, while limiting the risks of uncontrolled diffusion of the rm’s competences. In complicated organizational routines, the transfer of know-how can often be effective only if the organization is fully duplicated (Kogut 1988). In the case of an international–equity joint venture, usually the foreign partner (taking the countr y where the venture is implemented as the host countr y) brings in the technology that the local partner lacks. The local partner for its part often brings competences relating to the environment in which the joint venture will evolve. These competences include access to distribution networks and other local resources, relationships with the institutional environment and so forth. At the same time, those controlling the venture will have to deal with incorporating the various resources brought 214


by each partner and with the risks of opportunistic use that can be made of these resources, especially technology. There is no need to detail here the other theoretical approaches that we have mentioned, as the preceding developments show that control over a joint venture in any case cannot be limited to simple nancial control. In the transaction costs approach, a joint venture is established to protect its partners against the risk of opportunism. In the organizational learning approach, the joint venture has to allow an effective but controlled transfer of competences. An equity joint venture makes it possible to achieve these goals, but only if the partners actually control the activities. If they do not, with the accumulation of misunderstandings and suspicion in a crosscultural context, the joint venture is likely to fail. The diversity of the instruments of control Control of international equity joint ventures was initially considered in terms of distribution of capital between the partners (Stopford and Wells 1972). A partner who holds a majority share of the capital theoretically keeps control over strategic decisions, especially those relating to the appointment of managers, and thus obtains effective control of the management of the joint company. In practice, however, a minority partner will not agree to contribute to the working of the joint venture over a long time if the decisions do not protect the minority partner’s interests and do not take into account this partner’s vision of the problems. As the objective of a joint company is cooperation between various partners, the capacity of the authority that is drawn from holding a majority of the capital must be reassessed. Ever ything in this process is a matter of negotiation and search for compromise between partners in managing their subsidiar y. To exert effective control over the activities of the joint venture, the partners can use several mechanisms (Schaan 1983; Geringer and Hebert 1989; Kumar and Seth 1998): Active participation in the joint venture’s board of directors, whose composition is a fundamental operation. This is not limited only to the number of administrators that each partner has. Exercising control depends in particular on the capacity of certain administrators to in uence the points of view of other board members. Harrigan (1985) suggests choosing candidates who have signi cant international experience. Holding directorship positions. Directorship positions are considered essential by each partner. This is because partners transfer to the jointventure resources that they want to ensure are implemented effectively. Partners thus seek to prevent misappropriation and the risk of being taken as a hostage by the partner who keeps total control on certain key functions, particularly marketing. 215


Training and socialization of managers and other employees of the joint venture. Special technology transfer agreements or supply of speci c component parts between the partners of the joint venture. Close contacts between the managers of both partners, by installing committees and working groups to solve problems that the joint venture may encounter. We can add to this list the active involvement of both partners in de ning the structures of the joint venture – especially when they negotiate the establishment of the joint venture, but also when the board of directors deliberates. Active participation in de ning the venture’s structures allows each partner to understand better the control mechanisms that are set up. It is a huge task indeed, so that too often the preliminary negotiations relate only to de ning the nancial instruments of control and to structuring the chief functions of the organization. Further organization of each function is then delegated to each functional person in charge, to the detriment of both the global coherence of the joint venture and the transparency for each partner. Only a few empirical studies on international joint ventures have endeavoured to embrace simultaneously all these dimensions of control. To do so, it seems highly advisable to work with thorough case studies as did Schaan (1983), or to use a large survey that is far from easy in an international context, as did Killing (1982), Kumar and Seth (1998) or Zhang (1998). Such a survey appears to be very promising since it takes into account the complementarity of various instruments of control as well as the synergies that can emerge from their coordinated implementation. However, our intention in this study is more modest. Here we explore the two main instruments of control over equity joint ventures: distribution of capital and quantitative expatriation policy. The distribution of capital between partners Considering the host-country partner as the local partner, we can distinguish three types of equity joint ventures: majority joint ventures in which the foreign partner holds more than 50 per cent of the capital; 50/50 joint ventures, whose capital is distributed equally between the two partners; minority joint ventures, of which the foreign partner holds less than 50 per cent of the capital. Holding the majority of the capital constitutes a priori the key to controlling the joint venture – the guarantee of being able to supervise and manage ever y situation. Killing (1982) con rms this for joint ventures 216


established in developed countries. Holding either the majority of the capital, or a large part of it if there are more than two partners, allows this holder to establish control since as the majority partner they will be able to install more easily than the other partner(s) the essential instruments of control. However, holding a minority part of the capital, in particular when this situation has been accepted or imposed for political reasons as we observe in certain developing countries, does not necessarily mean that this partner remains passive or dominated. On the contrar y, this partner can compensate for apparent weakness by judicious recourse to other instruments of control. The fact that this partner generally brings the technology and know-how can help to strengthen its position. The 50/50 formula may appear to constitute a good compromise, in so far as it expresses the will of the partners to work on an equal footing. However, Killing (1982) underlines that in this case many dif culties may arise in decision-making. His ndings reveal that majority joint ventures are more stable and easier to manage. From his own research and assessment of works on the subject, Beamish (1985, 1992) has established that in developed countries, joint-venture companies are generally the 50/50 or majority types, whereas in developing countries these partnerships are generally of the minority type. Table 1 sets out the main part of the works that Beamish has used to support this thesis. Beamish (1985) speci es that in developing countries, 70 per cent of the joint ventures in the samples of Reynolds (1979) and Beamish (1984) are minority joint ventures. In his 1992 article, Beamish speci es that 60 per cent of the joint ventures in China sampled in his work with Wang (1989) Table 1 Distribution of the capital of international equity joint ventures in the studies used by Beamisha Country of establishment

Sources

Sample size

50/50 equity joint ventures (%)

Majority or minority equity joint ventures b(%)

Developed countries

Killing (1983) Beamish (1985) Geringer (1986)

40 153 86

50 43 70

50 57 30

Developing countries

Reynolds (1979) Beamish (1984) M & A (1985)

51 66 47

20 10 20

10–70 20–70 80

China

Beamish and Wang (1989)

805

31

9–60

Notes: a References for these studies are available in the bibliography of the Beamish (1985, 1992) articles. b When two percentages are given in the last column, the rst corresponds to the majority joint ventures, the second to the minority ones.

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were the minority type and only 9 per cent were the majority type. Unfortunately, the other studies do not specify the percentages of majority and minority joint ventures in their samples. This may be because at the time these studies were carried out, one of the ‘hot’ questions was: ‘Is the 50/50 joint venture appropriate or not?’ So why do multinationals give up majority control or equal division of capital in joint ventures in developing countries? The reasons usually offered attribute this to the laws and regulations or tax incentives of the host countries that impose minority participation on the foreign partner. A broad range of other reasons can be mentioned, in particular the problems of corruption which can encourage a partner to keep a low pro le (Beamish 1985). The empirical work we have done on French joint ventures in China and in Japan leads us to doubt the validity of these results, as noted in the introduction. However, we recognize the limits of our sample size for the French joint ventures. We therefore decided to work on the joint ventures created by Japanese companies world-wide, for which there are reliable statistical sources (To¯yo¯ Keizai 1999; see the second part of this paper). We aimed to test the validity of the following hypothesis: H1: In developed countries, most international joint ventures are the 50/50 or majority types, whereas in developing countries, most are the minority type. Expatriation policies The distribution of directorship positions can be studied either directly, through investigation inside the joint ventures (e.g. Zhang 1998) or indirectly, starting from quantitative observation of the detachment practices of expatriated managers by the mother company to the joint ventures. Because of the nature of the data that we have, we have adopted the second approach for the present study. Expatriation policies are developed to meet a variety of aims. These aims include controlling both the activities abroad and the effectiveness of knowhow transfers (Perlmutter 1969), as well as training, enriching the experience of and socializing expatriated managers (Edström and Galbraith 1977). Perlmutter (1969, 1974) proposed a typology of expatriation policies that is widely accepted by scholars who have looked in depth at this issue. Perlmutter’s typology distinguishes four types of expatriation policies: The ethnocentric approach, in which the values, practices and know-how of the home countr y are recognized as higher and so must be transferred to the subsidiaries abroad. The number of expatriates detached from head of ce to the subsidiaries will thus be high and fewer management positions will be offered to locals. 218


The polycentric approach, in which the values and practices of a foreign country are recognized as dif cult to understand so that a manager from the rm’s country of origin will have dif culties acting ef ciently in the foreign context. It is thus better to entrust responsibilities to local managers. The geocentric approach, which applies to multinational rms in an advanced stage of development, such that nationality is no longer a signi cant criterion for recruitment and assignment of high-level managers. The rm has an integrated vision of its world activities. It will tr y to assign the best person to a management position in a given country whatever the origin of the candidate (local, from the country of the head of ce, or from anywhere else). Expatriation is no longer in a single outbound direction from the head of ce towards the subsidiaries, but also involves moves between subsidiaries, and from subsidiaries to head of ce. Regiocentrism corresponds with the emergence of regional blocs (Europe, ASEAN, etc.) that are perceived as relatively homogeneous spaces. Here it recognized as best to organize and manage expatriates to maximize the bene ts from economies of scale (Ellis and Williams 1995). Human resources are managed partly on this regional level (including mobility and performances of the group for the whole zone, which are taken into account in calculating managers’ remuneration). The approach that a rm uses appears to depend on the degree of development of both the multinational corporation and the host country (Perlmutter 1969; Edström and Galbraith 1977). The degree of development in the country where the operation is established conditions the availability of local candidates who are suitable for management positions. In developing countries, stronger control by the overseas head of ce can be necessar y to avoid misuse or diversion of the foreign company’s resources. Consequently, in developing countries the ethnocentric approach generally prevails. The polycentric approach is usual for establishing joint ventures in industrialized countries, where more highly quali ed human resources are available. The passage to a geocentric or a regiocentric approach seems to be characterized by the degree of development of the multinational rm itself, as the rm adopts sophisticated modes of managing its human resources while seeking greater ef ciency on a global scale. Using this widely accepted model, and with Japanese joint ventures world-wide as our case study, we test the following proposal: H2: The number of expatriates detached from head of ce to overseas joint ventures is on average higher for joint ventures established in developing countries than for joint ventures in industrialized countries.

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EMPIRICAL VALIDATION USING JAPANESE JOINT VENTURES ABRO AD AS O UR CASE STUDY Here we rst discuss the methodology that we have adopted, before moving to discussion of our main results. Methodology In this study we have used data from the Kaigai Shinshutsu Kigyo¯ So¯ ran 99 (1999 Directory of Subsidiaries of Japanese Companies Abroad) published by To¯yo¯ Keizai. This annual directory is prepared through a vast investigation surveying Japanese companies; the 1999 edition surveyed 5,762 head of ces, with a response rate of around 60 per cent, identifying 19,036 subsidiaries world-wide). The widespread professional use in Japan of the To¯yo¯ Keizai directories in a large number of elds suggests that companies respond carefully to the To¯yo¯ Keizai questionnaires. In the directory used for this study, subsidiaries are classi ed by country with the following data provided: name and nationality of each partner; capital share held by each partner; name, address, telex and phone number of the subsidiar y; year of creation; capital; turnover; manpower; number of expatriates; and description of the activity of the subsidiar y. We carried out a systematic random sampling of 868 subsidiaries: 323 equity joint ventures, on which this contribution is founded, and 545 fully owned enterprises. Our mode of sampling guarantees that the data are representative by geographical area and by other characteristics of the companies. The data were processed using SPSS 10.0 and SIMCA P 8.0 software. The assumptions to be tested in our hypotheses distinguish between only two types of countries: developed and developing. For the Japanese case, it seems judicious to make a further distinction for the newly industrialized countries in Asia, which played a particular role in the international strategies of Japanese rms. Thus, in our sample, countries whose GDP per capita is lower than $4,000 per annum are regarded as developing countries. The industrialized countries include those of the European Union and North America as well as Australia and New Zealand. The group of Asian newly industrialized countries (Asian NICs) includes South Korea, Singapore, Hong Kong and Taiwan, the word ‘countr y’ being applied to these two last areas in a broad sense and without political signi cation. Variable results for ‘distribution of capital’ For reasons related to the particular organization of groups in Japan ( Jaussaud 1998), international joint ventures created by Japanese companies frequently have several Japanese partners. The joint venture is regarded as ‘minority’ when the Japanese partners together hold not more 220


than 49 per cent of the capital. When the Japanese partners together hold 50 per cent of the capital precisely, the joint venture is regarded as ‘50/50’. When the Japanese partners hold more than 50 per cent of the capital, the joint venture is the ‘majority’ type. Table 2 and Figure 1 cross the three types of joint ventures with the three levels of development of the country where the venture is established. Table 2 Percentage of minority, 50/50 and majority joint ventures according to the degree of development of the country of establishment Level of developmen t

Capital held by Japanese partners (%) Minority

Total

50/50

Majority

Developing countries (LDCs) Count Row (%)

95 44.2

17 7.9

103 47.9

215 100.0

Developed countries (DCs)

Count Row (%)

16 32.0

11 22.0

23 46.0

50 100.0

Asian NICs

Count Row (%)

17 29.3

7 12.1

34 58.6

58 100.0

Total

Count 128 Row (%) 39.6

35 10.8

160 49.5

323 100.0

Note: Chi-square = 12.2; sign. = 0.016. 100

48

46

59

90 80

Per cent

70 60 50

8

40

44

30

22 12

Japanese capital (%)

32

29

20

majority

10

50/50

0

minority LDCs

DCs

NICs Asia

Level of development Figure 1 Percentage of minority, 50/50 and majority joint ventures according to the degree of development of the countr y of establishment

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At rst glance, it seems that in terms of majority interests Japanese companies differentiate their behaviour only slightly between industrialized and developing countries (46 per cent against 48 per cent). However, we can observe certain tendencies in these data: more minority joint ventures in developing countries, more majority joint ventures in the Asian NICs, and a relatively high number of 50/50 joint ventures in the industrialized countries. Our rst hypothesis was that in developed countries, most international joint ventures are the 50/50 or majority types, whereas in developing countries, most are the minority type. In our sample, 68 per cent of the joint ventures in industrialized countries are the 50/50 type (22 per cent) or majority type (46 per cent); 71 per cent are so in the Asian NICs and 56 per cent are so in the developing countries. Thus, in absolute terms, H1 has to be rejected, since even in developing countries more than half of the joint ventures (56 per cent) are 50/50 or majority types. However, the joint ventures are signi cantly more often the 50/50 or majority types in the industrialized countries and the Asian NICs than in the developing countries, as a Student’s t-test comparing proportions shows.1 Let us now consider more precisely the joint ventures established in industrialized countries, focusing rst on the 50/50 type, and then on the majority type. In our sample only 22 per cent of the joint ventures in industrialized countries are the 50/50 type (see Table 3). This percentage seems far from the 43 per cent, 50 per cent and 70 per cent found respectively by Beamish (1985), Killing (1983) and Geringer (1986). However, we need to recognize that it is in the industrialized countries that the 50/50 participation is most frequent and in the developing countries that it is rarest with only 7.9 per cent of the cases. A Student’s test of differences of Table 3 Share of capital held by Japanese partners in speci c countries Country

Majority (%)

50/50 (%)

Minority (%)

Number of observations

Vietnam Indonesia Taiwan Hong Kong Brazil

100.0 71.4 71.4 70.0 57.1

0.0 7.1 4.8 20.0 0.0

0.0 21.4 23.8 10.0 42.9

5 28 21 10 7

China UK Singapore Thailand South Korea

50.7 50.0 50.0 42.6 42.1

12.7 20.0 0.0 0.0 21.1

36.6 30.0 50.0 57.4 36.8

71 10 8 54 19

USA Malaysia Philippines

37.5 31.6 16.7

43.8 10.5 0.0

18.8 57.9 83.3

16 19 12

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proportions gives a t-value of 2.91 (sign. = 0.002) con rming that this statistical difference can be regarded as signi cant. We can thus con rm that the 50/50 type is observed more frequently in industrialized countries than in developing countries. Let us consider some speci c countries for which the number of observations is equal to or more than 5. The case of the United States is particularly interesting as the only one where the 50/50 type is frequent. Here 43.8 per cent of our sixteen observations are the 50/50 type, exceeding both the majority type (37.5 per cent) and the minority type (18.8 per cent). It is possible that the United States was overrepresented in the studies that concern the developed countries that are quoted in Table 1. In this case their conclusions would be skewed and cannot be generalized. In our sample, 46 per cent of the Japanese joint ventures in industrialized countries are the majority type. However, we can observe a similar tendency in developing countries (48 per cent) and in the Asian NICs (59 per cent). Without the Student’s t-tests being signi cant at 5 per cent of error2 but at the threshold of 10 per cent of error, we can say that Japanese companies have a preference for majority interests in the Asian NICs. In examining Table 3 more closely, we recognize that geographical and geopolitical considerations undoubtedly play a signi cant role. For example, Japanese companies have a ver y clear preference (70 per cent of the cases) for majority interests in the following countries: Vietnam, Indonesia, Taiwan and Hong Kong, i.e. in Southeast Asia where Japanese companies have invested hugely since the middle of the 1980s. In China too, since 1992, the tendency is to create majority-type joint ventures (60 per cent of the cases of our sample), whereas before this time, as Beamish and Wang (1989) found, the joint ventures were primarily the minority type. To conclude our discussion for the rst hypothesis, our statistical results tend to con rm the ndings of Beamish, who postulated that in the developed countries equity joint ventures are more often the 50/50 or majority types, whereas in the developing countries they are more often the minority type. Results relating to expatriation policies Table 4 presents data on the average number of expatriates that Japanese partners send to joint ventures, organized by the level of development of the host country. At rst glance, the number of expatriates is higher in the developing countries (2.84) than in the Asian NICs (1.62) or in the industrialized countries (1.75). Moreover, the standard deviation is de nitely higher for the developing countries (3.50) than for the Asian NICs (1.72) and the industrialized countries (1.96), which show a larger diversity of situations. The results of Student’s t-tests3 comparing means con rm that 223


Table 4 Average number of expatriates by level of development of the country where joint venture is located

Developing countries Asian NICs Industrialized countries


Average number of expatriates

Standard deviation

Condence interval at 95%

214 58 48

2.84 1.62 1.75

3.50 1.72 1.96

[2.36–3.31] [1.17–2.07] [1.18–2.32]

the expatriation practices are signi cantly different when Japanese partners send expatriates to developing countries (see Table 5). Using these data we can validate assumptions to be tested with our second hypothesis. In H2 we posited the number of expatriates detached from head of ce to overseas joint ventures is on average higher for joint ventures established in developing countries than for joint ventures in industrialized countries. Indeed, the data indicate stronger tendency towards ethnocentric behaviour when the joint venture is established in developing countries than when it is established in industrialized countries or in Asian NICs. We indicated earlier in this article that partners generally combine several instruments of control. Bearing this in mind let us turn to consider the share of capital held by Japanese partners and the expatriation practices in each of the three zones we have distinguished. Data in Table 6 con rm, in a general way, that Japanese companies send more expatriates to developing countries than to industrialized countries or to Asian NICs and this practice is independent of the Japanese rms’ share of the capital. This behaviour is probably related to the underquali cation of local managers in the developing countries. However, the number of expatriates in developing countries is even higher when the Japanese partners hold a majority share of the capital (3.4 expatriates on average) than when they hold a minority share (2.4 expatriates on average).4 This same trend, though to a lesser degree, can be observed for the Asian NICs. Here Japanese partners send on average 2.1 expatriates when they hold a majority share of capital, compared to only 0.8 expatriates when they hold a minority share of capital.5 The mean number of expatriates sent to joint ventures is generally lower Table 5 Student’s t-tests comparing the mean number of expatriates that Japanese partners send to developing countries, to developed countries and to Asian NICs Student’s t-test

Asian NICs

Industrialized countries

Developing countries Asian NICs

t = 3.70 (sign. = 0.000)

t = 2.93 (sign. = 0.004) t = 2 0.36 (sign. = 0.722): not signi cant

224


Table 6 Average number of expatriates sent by Japanese partners according to the level of development of the countr y of establishment and the Japanese partners’ share of the capital Capital held by Japanese partners (%)

Average number of expatriates


Developing countries

Minority 50/50 Majority

2.4 1.8 3.4

95 17 103

Asian NICs


0.8 1.0 2.1

17 7 34

Developed countries


1.2 2.6 1.7

16 11 23

in industrialized countries than in developing countries or Asian NICs. This is undoubtedly due to the availability of high-level local managers in the industrialized countries. The difference between the mean number of managers expatriated to minority joint ventures (1.2) and to majority joint ventures (1.7) is not signi cant.6 On the other hand, the average number of expatriates who Japanese partners send to 50/50 joint ventures in industrialized countries is surprisingly high (2.6). In our sample the 50/50 joint ventures are established mainly in the United States. We therefore advance as explanation that Japanese partners send their expatriates to be trained in the industrialized countries in general, and in the United States in particular, as posited earlier by Edström and Galbraith (1977). The share of capital held by Japanese partners and the number of expatriates sent abroad to the joint venture are two essential factors of control. The relationship between these two factors deserves more rigorous analysis. By means of PLS (partial least square) regression, we have examined in detail a number of elements that are likely to in uence the number of expatriates that a partner sends to international joint ventures. PLS regression has several mathematical properties that justify its interest and increasing success. Several statistical packages are speci cally devoted to PLS regression, such as the Unscrambler (Camo) and SIMCA-P (Umetri AB) version 8.0, which we have used here. Other software like SAS (Proc PLS) and Statistica have recently integrated PLS regression. Compared to the traditional multiple regression, among the advantages of PLS regression we are especially interested in the way it treats the problem of collinearity between explanatory variables (Tenenhaus 1998). Collinearity or multicollinearity is the undesirable situation where correlations among the independent variables are strong, which is especially the case in our regression. Indeed, the variables ‘turnover’, ‘capital’ and ‘number of employees’ are correlated strongly as all three measure the size of the joint venture. 225


Moreover, like principal component analysis, PLS regression creates a twodimensional factor chart that allows one to visualize precisely and simultaneously the multicollinearity between the explanatory variables and their in uence on the variable to be explained. Besides the degree of participation in the capital, we enter into the PLS regression the following independent variables: the number of Japanese partners, the GDP per capita of the host countr y as well as the capital, turnover and manpower of the joint venture ( JV). The Simca-P 8.0 software creates an explorator y factorial chart, displaying the components T(1) and T(2) of the PLS regression, which visualize the interaction between the independent variables and the depending variable which is ‘the number of expatriates’ sent to JVs abroad (see Figure 2). The rst PLS factor component T(1) measures the size of the joint ventures. Consistent with our conclusions drawn from Figure 1, the second PLS component T(2) accounts for the reversed relationship between the GDP per capita of the host countr y (negative values on the axis) and the share of capital held by the Japanese partners (positive values). The variable to be explained – the number of expatriates – positions halfway between the two explanatory factors to which it is positively correlated: the size of the joint venture and the participation in its capital. On the other hand, it is diametrically opposed to the explanator y factor acting in the opposite direction, especially the level of development of the host countr y. This second conclusion accords with Perlmutter’s model that claims the lower T (1): first PLS component -0.10 0.60

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

% capital Japanese partners 0.50 0.40 0.30

T (2): second PLS component

Registered capital JV

Explaining factor: participation level Number of expatriates

0.20

Number of Japanese partners

0.10 0.00 -0.10 -0.20 -0.30 -0.40

Turnover of the JV

Explaining factor: level of development of the host country

Explaining factor: size of the cooperation

GDP per capita

-0.50 -0.60

Manpower JV

Figure 2 Factor chart resulting from a PLS regression joining several variables that in uence the number of expatriates in an international equity joint venture

226


the GDP per capita of a host countr y, the more the mother company sends expatriate managers. The regression relation computed by the Simca software, giving the weight of each factorial axis in the global explanation of the endogenous variable, is written as follows: Number of expatriates = 0.329 T(1) + 0.257 T(2) The PLS regression coef cients can now be computed by multiplying their coordinates on the two factorial axes by their respective weights in the PLS regression (see Table 7).7 These coef cients inform usefully about the intensity of the relationship between various independent variables and the variable to be explained. Simca software also computes the variable in uence on Y of ever y term (X) in the model, called ‘variable importance’ (VIP). The VIP allows us to classify the independent variables (X ) according to their capacity to explain Y. Variables with a strong VIP (>1) are most important in the construction of Y. Generally, a regression coef cient can be taken into account if its VIP exceeds the threshold of 0.50. The VIP thus plays the same role as the Student t-tests for regression coef cients in ordinary multiple regression. However, while the VIP takes into account the correlation between explanator y variables, it is not always the variable having the strongest regression coef cient that has the largest VIP. The regression equation states that the number of expatriates is in uenced positively by the share of capital held by the Japanese partners (PLS coef cient = 0.22) as well as by the size of the joint venture measured by its capital (PLS coef cient = 0.39) and by its turnover (PLS coef cient = 0.11). The level of development, estimated by GDP per capita, acts contrary to the number of expatriates (PLS coef cient = 2 0.13): the lower the GDP per capita of the country of establishment, the more the Japanese partners detach expatriates. The variable ‘total number of employees’ is caught between two contradictory effects.8 As it is positively correlated with the variables in the ‘size of the joint venture’ group, it has a positive coordinate on the rst factor component. Nevertheless, as it is also positively correlated

Independent variables (X)

Table 7 PLS regression coef cients (extraction of two components) Variable to be explained: Y = number of expatriates

PLS

VIP a

Capital (in US dollars) Capital held by the Japanese partners (%) Turnover (in US dollars) Number of Japanese partners Total number of employees (manpower JV) GDP per capita of the host country (Constant)

0.39 0.22 0.11 0.08 2 0.04 2 0.13 0.75

1.69 0.75 1.11 0.37 0.49 1.00 –

Note: a Bold numbering indicates signi cant variables.

227


with ‘level of development’, it has a negative coordinate on the second factor component. When these coordinates are balanced by the respective weights of the factor components, the resulting regression coef cient is almost equal to zero. Finally, the number of Japanese partners seems to in uence only slightly the number of expatriates (PLS coef cient = 0.08). These conclusions are coherent with all of our ndings thus far. CONCLUSION Foremost we underline that research on the control of international equity joint ventures must be carried out from a multidimensional perspective. It has to take into account both the diversity and the coherence of the control instruments that are used. In this article we contribute to the multidimensional perspective with our study of two speci c instruments of control: distribution of the capital of the joint venture between the partners, and the number of expatriates detached. Our rst objective was to test the results of former studies, according to which joint ventures in developing countries are generally of the minority type, and expatriation policies for joint ventures in these countries show ethnocentric behaviour. On the other hand, in developed countries the joint ventures would be generally the 50/50 or majority types and the expatriation policies would be rather polycentric or geocentric, according to the typology of Perlmutter (1969, 1974). Our research using data on Japanese joint ventures world-wide suggests that both control and expatriation practices do not exhibit these contrasts between developed and developing countries, even though some differences are evident. Several cases call for more detailed analysis. For example, we can observe contrasting methods of control over joint ventures in China between the waves of investment in the 1980s and in the 1990s. In speci c developing countries such as Vietnam and Indonesia most Japanese joint ventures are the majority type. It is not so much the degree of development that explains the share of capital that the various founders of the joint venture seek to hold. It is more so the legal framework and regulations of the host country as well as expectations of the local actors, public authorities and potential partners. Our research also suggests that the model of the 50/50 joint venture, long promoted for joint ventures in developed countries, seems to have lost its appeal to the majority type. The 50/50 joint venture is probably the type favoured for investments carried out in the United States. This claim af rms the results of Killing (1983) and the comments of many international managers that we met over the last few years. For them, 50/50 joint ventures are dif cult to manage while the search for consensus or compromise between partners from different managerial cultures continuously blocks the decision-making process. 228


Our research validates the general expatriation model proposed by Perlmutter (1969, 1974). This model was enriched by the suggestions of Edström and Galbraith (1977) who see expatriation as an instrument of training and socialization of managers and of organizational development. Our empirical validation with the case of Japanese joint ventures world-wide consolidates and reinforces the degree of general validity of this model. While we recognize that this study has contributed to our knowledge in this eld, we recognize that our contribution suffers from two principal limits. First, we do not justify the validity of our choice of case study, even though we recognize the frequent claim that Japanese companies have speci c cultural and organizational identities that could be seen to skew the results. Space limits prevent us from developing this important point. The second limit relates to the distribution of the capital of the joint venture. One can wonder why our results are less distinctive than those of the earlier studies listed in Table 1. This outcome perhaps results from recent evolution of the practices related to opening certain developing countries more broadly to foreign investors, for instance China. To explore further it would be advisable to classify our sample not only by geographical areas, but also by time periods. As crossing several criteria leads to increasingly ne subgroups, this supposes working with a bigger sample. That is what we plan to do as an extension of this contribution. François Rabelais University of Tours, France University of Poitiers, France

NOTES * Zhang (now deceased) was an active and valuable member of our team and through her work helped to enhance knowledge about the rapid economic and social changes now taking place in her home country – China. We remember and thank her most sincerely for her contribution, and would like to express, through this medium, our deepest sympathy to her family. 1 The t-test of Student allows checking if an observed difference is signi cant between two proportions computed out of two samples drawn from the same mother population. The value t is calculated according to the formula: t0 =

( f2 2

Ö

pˆ(1 2

f1)

(

1 1 pˆ) __ + __ n1 n2

)

where fi and ni represent the proportion and the number of observations in the two samples; pˆ is the weighted average of the two proportions. The observed value t0 must be compared to a value corresponding to a desired degree of con dence. Comparison between industrialized countries and developing countries, the observed t-value of differences in proportions is equal to 1.58 with a signi cance

229


level of 0.057, which means that we have 94.3 per cent con dence that the observed difference is real. Comparing between Asian NICs and developing countries, the t-value is 2.05 (sign. = 0.020). 2 The value t of Student differences in proportions is equal to 1.58 (sign. = 0.057). 3 The value t of Student differences in proportions is equal to 2.05 (sign. = 0.020). 4 We use a Student t-test for comparison of means observed on two samples, whose formula is: t0 =

5 6 7 8

(m2 2

Ö(

m1)

s 21 s2 __ + __2 n1 n2

)

where mi , ni , s 2i are the observed means, the number of observations and the variance of each sample. Test of Student differences in means: t = 1.88 (sign. = 0.031). Test of Student differences in means: t = 3.0 (sign. = 0.002). For example, the coordinates of the variable ‘capital’ are 0.76 on T(1) and 0.54 on T(2); the regression coef cient is calculated as follows: (0.329 3 0.76) + (0.257 3 0.54) = 0.39. See the correlation matrix in the Appendix.

APPENDIX: CO RRELATION MATRIX Number of expatriates

Capital of the JV

Japanese Turnover capital (%)

Number of partners

Total employees

GDP per capita

Pearson correlation Sig. (2-tailed)

1.00

0.25

0.18

0.02

0.04

0.08

2 0.11

–

0.00

0.00

0.78

0.49

0.16

0.04


0.25

1.00

2 0.08

0.59

0.07

0.55

0.15

0.00

–

0.16

0.00

0.23

0.00

0.01


0.18

2 0.08

1.00

2 0.05

2 0.02

2 0.04

0.08

0.00

0.16

–

0.35

0.76

0.42

0.14

Turnover


0.02

0.59

2 0.05

1.00

0.00

0.52

0.10

0.78

0.00

0.35

–

0.98

0.00

0.06

Number of partners


0.04

0.07

2 0.02

0.00

1.00

2 0.03

2 0.28

0.49

0.23

0.76

0.98

–

0.64

0.00

Total employees


0.08

0.55

2 0.04

0.52

2 0.03

1.00

0.12

0.16

0.00

0.42

0.00

0.64

–

0.04

GDP per capita


2 0.11

0.15

0.08

0.10

2 0.28

0.12

1.00

0.04

0.01

0.14

0.06

0.00

0.04

–

Number of expatriate s Capital of the JV

Japanese capital (%)

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