Journal of International Management 7 (2001) 295 – 315 Negotiating control and achieving performance in international joint ventures: A conceptual model Aimin Yana,*, Barbara Grayb,1 a School of Management, Boston University, 595 Commonwealth Avenue, Boston, MA 02215, USA Department of Management and Organization, 408 Beam Business Administration Building, Pennsylvania State University, University Park, PA 16802, USA b Abstract Adapting well-established organization theories to international joint ventures (IJVs), this paper develops an overarching theoretical model of the determinants and effects of parent control of IJVs from an interpartner bargaining power perspective. Drawing upon power dependence, transaction costs, and agency theories, we argue that the relative bargaining power between IJV partners serves as the key determinant of control structure, and that control exerts a direct effect on the venture’s performance. In addition, government influence and interpartner working relationship are critical factors that complicate the linkage between control and performance but may help to explain past conflicting results. Propositions regarding these relationships are formed for future empirical test, and implications and directions for future research are provided. D 2001 Elsevier Science Inc. All rights reserved. Keywords: International joint ventures; Bargaining power; Control structure; Performance 1. Introduction International joint ventures (IJVs) continue to proliferate as a hybrid form of organizational governance so much so that it has been suggested that we are stepping into an ‘‘age * Corresponding author. Tel.: +1-617-353-4165; fax: +1-617-353-5244. E-mail addresses: aimin@bu.edu (A. Yan), b9g@psu.edu (B. Gray). 1 Tel.: + 1-814-865-3822; fax: + 1-814-863-7261. 1075-4253/01/$ – see front matter D 2001 Elsevier Science Inc. All rights reserved. PII: S 1 0 7 5 - 4 2 5 3 ( 0 1 ) 0 0 0 4 9 - 7 296 A. Yan, B. Gray / Journal of International Management 7 (2001) 295–315 of alliance capitalism’’ (Dunning, 1995). However, the literature on IJVs has grown to the point that multiple perspectives are being advanced and inconsistent empirical results are accumulating; therefore, theoretical integration and consolidation become necessary (Beamish and Killing, 1996). One of the most critical aspects of IJV management is the exercise of control by the IJV partners, or the IJV parent firms (Beamish, 1984; Parkhe, 1993a,b). In 1984, Lecraw argued that the determinants and impact of parent control on IJVs was a subject of considerable controversy. Despite one-and-a-half decades of additional research (e.g., Geringer and Hebert, 1989; Yan, 1993; Hebert, 1994; Child et al., 1997), this controversy continues. This paper offers a theoretical integration of various explanations of management control in IJVs. Using an interpartner bargaining perspective we develop an overarching model of management control in IJVs drawing upon well-established organization theories (e.g., power dependence, agency, transaction cost, and trust theories). We adapt these theories to the context of international business partnerships. By focusing on both competitive and cooperative dynamics between the IJV partners, we develop a theory to explain both the determinants of control and how control and interpartner relationships interact to impact the IJV’s ability to achieve the founding objectives of both its parent firms. The term ‘‘parent’’ refers to the multinational corporation (MNC) and the host country organization that have invested in the joint venture. For the purposes of our discussion, however, we will use the terms ‘‘parents’’ and ‘‘IJV partners’’ interchangeably, although it is possible that some partners (such as government agencies who invest in IJVs) are technically not ‘‘parents.’’ Below, we review previous research and establish the need for a theoretical explanation of control in IJVs. Then, we develop a theoretical model and offer a set of propositions to guide future empirical investigation. Finally, we discuss the implications of the model for future research on joint ventures that span international boundaries. 2. Previous research on control in IJVs 2.1. The nature of control Generally, management control refers to the process by which an organization influences its subunits to achieve its objectives (Flamholtz et al., 1985). Control in IJVs is ‘‘the most common variable discussed in conjunction with performance’’ (Beamish, 1984, p. 45), and it has been studied primarily in international, rather than the domestic, joint ventures. Early research on control (e.g., Tomlinson, 1970; Franko, 1971; Stopford and Wells, 1972) extended the concept from wholly owned international subsidiaries to the context of IJVs, and adopted a strategic perspective that focused on the relationship between the international strategy of the MNC, the strategy of the other partner, and IJV control. In this work particular attention was paid to the MNC’s desire to control, rather than the actual exercise of control (Geringer and Hebert, 1989). A second approach to control that focuses on the control structure itself was offered by Killing (1983). His milestone study proposed that control is inherently a relative phenom- A. Yan, B. Gray / Journal of International Management 7 (2001) 295–315 297 enon. Killing not only sharpened the conceptualization, but also shifted the unit of analysis from the MNC parent to the IJV as an interfirm arrangement. This work has since been followed by a stream of inquiry on control in IJVs (e.g., Schaan, 1983; Lecraw, 1984; Beamish, 1984; Geringer and Hebert, 1989; Blodgett, 1991; Yan, 1993; Yan and Gray, 1994, 2001; Hebert, 1994; Child et al., 1997). These studies, however, do not share a single, consistent notion of control. For example, Geringer and Hebert (1989), building on earlier work by Schaan (1983), defined control as a multidimensional construct comprised of the scope, the extent, and the mechanisms of influence that the IJV parents exercise. Hebert and Beamish (1994) defined control as the process by which behavior and output of the venture are influenced by an IJV partner. Additionally, Child et al. (1997) largely relied on Killing’s (1983) construct. We base our definition of control on Killing’s (1983) original one: the amount of decision power each parent exercises in the venture’s daily operation. However, we believe that focusing only on operational control is too limited since Yan and Gray (1994) found that IJV parents exert management control in three different ways: (1) making strategic decisions, (2) managing the venture’s routine operations, and (3) designing the IJV’s corporate structure and operating procedures. Therefore, we define control as the extent of influence exercised by each partner over these three dimensions of control: strategic, operational, and structural. Future reference to ‘‘management control’’ in this manuscript includes all three dimensions. Thus, ‘‘strategic control,’’ ‘‘operational control,’’ and ‘‘structural control’’ will be used to indicate these specific types of management control. Because of the relational character of control (Galaskiewicz, 1985; Killing, 1983), we pay special attention to the relative division of control among the IJV’s partners across these dimensions. Thus, control is, necessarily, a multidimensional construct and a relative one. In addition to the structure or relative division of control among the parents, previous research also addressed the mechanisms of control. This view stresses the parent firms’ intentions to control and argues that an IJV partner can most effectively exercise control by integrating the IJV with this parent firm’s overall strategy and human resource practices (e.g., by nominating the venture’s key personnel) (Schaan, 1983; Geringer and Hebert, 1989).2 Yan and Gray’s (1994) in-depth case studies concur that nomination of executives offers a critical means of control at the strategic and the operational levels. Thus, a model of control should reflect both the intention to control and the means by which control is implemented. 2.2. The determinants and effects of control Of critical importance to the management of IJVs is how control is acquired and maintained by the partners and whether exercise of that control produces desired outcomes. Early research on these issues was dominated by a perspective of ‘‘intention to control,’’ first introduced by Tomlinson (1970). Essentially, from this perspective, a partner gains and 2 It is important to note that there is a discrepancy between the conceptualization (e.g., Geringer and Hebert, 1989; Schaan, 1983; Tomlinson, 1970) and empirical operationalizations of this perspective that have typically relied on data from the MNC partner only (e.g., Killing, 1983; Hebert and Beamish, 1994; Hebert, 1996). 298 A. Yan, B. Gray / Journal of International Management 7 (2001) 295–315 maintains control over the venture by creating and maintaining a fit between its strategy and the IJV’s control structure (Franko, 1971; Geringer and Hebert, 1989). Franko (1971) suggested that an MNC should tighten control over its IJVs or decrease the IJVs’ autonomy when the parent firm attempts to standardize or centralize its international marketing policies or consolidate production facilities. Blodgett (1991) argued that increased control over an IJV is necessary for the parent who transfers critical strategic resources (e.g., proprietary technologies) to the venture. In order to curb opportunism by its partners and prevent unauthorized technology leakage, an IJV parent has to increase its control over its strategic resources. Often, when an IJV becomes strategically important to one of the parents, this parent firm will seek to convert the venture from a partnership to a wholly owned or dominantly controlled entity (Killing, 1983; Hennart, 1988). The effect of control and, particularly, the performance implications of control in IJVs have been an extremely appealing topic for scholars and practitioners alike. However, previous research generated inconsistent results (see Geringer and Hebert, 1989 for a review of early research on the subject). Recent empirical efforts have consistently shown that management control over an IJV’s daily operations exerts a strong effect on IJV performance (Yan, 1993; Hebert and Beamish, 1994; Child et al., 1997; Mjoen and Tallman, 1997; Yan and Gray, 2001). These studies also suggest that the control–performance linkage is nonlinear and may be moderated by other variables. Theoretical explanations of these relationships remain underdeveloped, however. In summary, previous studies have laid a rich conceptual foundation on which research on control in IJVs has advanced. While the view of intention to control (Tomlinson, 1970) suggested that the partners’ corporate strategies would influence their desire for control of an IJV, it offered an insufficient explanation for what occurs when two or more partners’ strategies motivate them all to seek influence and control of the IJV. We argue that in IJVs the parents must negotiate their respective strategic intention to control and reach some accommodation about who will exercise control and how. What is needed is a theoretical model that accounts for these negotiated relationships among the partners at the IJV’s inception. While intention to control may serve as a critical input to these negotiations, we focus on exercised, rather than intended, control, and argue that the structure of control eventually adopted by the IJV depends on the partners’ relative bargaining power. Additionally, implementation of the control structure (or exercised control) occurs through dynamic interactions among the partners. Below we build a theoretical model of the determinants of exercised management control and its outcomes in IJVs. 3. A model of the determinants of control and its effect on performance 3.1. Bargaining power as a determinant of control We argue that any explanation for how control is achieved must consider the relative bargaining power of each parent. A central argument of this view is that management control, at the time of the IJV’s founding and subsequently, is determined by the parents’ relative A. Yan, B. Gray / Journal of International Management 7 (2001) 295–315 299 bargaining power. The initial distribution of control is the result of negotiations among the partners and the host country government, and ultimately rests on the relative bargaining power of these parties. Once a particular control structure is established, however, changes in relative bargaining power, such as those that occur in the obsolescing bargain (Vernon, 1977; Hamel, 1991; Inkpen and Beamish, 1997), can precipitate its subsequent realignment. The notion of bargaining power is rooted in power-dependence theory (Emerson, 1962), which posits that one actor’s power is derived from another’s dependency. More specifically, Actor A’s dependence on Actor B is ‘‘directly proportional to A’s motivational investment in goals mediated by B, and inversely proportional to the availability of those goals to A outside of the A–B relation’’ (Emerson, 1962, p. 32). An actor involved in an exchange transaction can gain bargaining power by decreasing its dependence on its partner, increasing the number and quality of alternatives that it can substitute for its relationship with this partner, cultivating the dependence of the partner on the focal actor, or reducing the partner’s viable alternatives (Cook, 1977; Bacharach and Lawler, 1984). From this perspective, bargaining power is defined as the capability of the bargainers to favorably reframe or change the bargaining relationships (Lax and Sebenius, 1986), to win accommodations from the other (Dwyer and Walker, 1981; Tung, 1988), and to influence the outcome of a negotiation (Schelling, 1956) that, in the case of IJV negotiations, means gaining control over the joint venture. It is clear that power-dependence theory conceptualizes bargaining power as a relative phenomenon, which always is assessed through interpartner comparison. ‘‘In the literature on interorganizational relations, power has always been conceived in relational terms and, more specifically, within a social exchange framework’’ (Galaskiewicz, 1985, p. 283). Similarly, parent control in IJVs is also relational, as assessed by the division of control among the partners (Killing, 1983; Beamish, 1984; Schaan, 1983; Yan and Gray, 1994). Therefore, throughout this paper, bargaining power and management control are both treated as relational concepts, and discussed on an interpartner comparative basis. Reference to one partner’s bargaining power or control is always relative to the other’s. For simplicity, our discussion assumes that an IJV has two partners. However, we note that in IJVs with more than two partners, coalitions among partners may complicate the analysis of bargaining power somewhat. Empirical evidence for the linkage between bargaining power and control has been accruing. For example, Fagre and Wells (1982) reported that the MNC’s bargaining power in dealing with a local government had a direct effect on control, as reflected in the MNC’s equity ownership in the IJV. Similarly, Lecraw (1984) found a direct relationship between the MNC’s bargaining power as the degree of management control it exercised as well as the ownership level it achieved. Harrigan (1986) observed that many firms strive for majority ownership in an IJV to gain bargaining power that leads to control over the venture’s operation. Partners may also contribute noncapital resources to enhance their bargaining position and control in negotiations (Harrigan and Newman, 1990; Yan and Gray, 1994; Mjoen and Tallman, 1997). 3.2. Two types of bargaining power IJV partners can wield two kinds of bargaining power, each derived from a different source of interdependence among the partners: context-based and resource-based bargaining power. 300 A. Yan, B. Gray / Journal of International Management 7 (2001) 295–315 As Yan and Gray (1994) and Mjoen and Tallman (1997) have shown, both kinds of bargaining power influence the distribution of management control among the partners. 3.2.1. Context-based bargaining power One derivative of power-dependence theory stresses the context-dependent relationships between the bargainers. It argues that the relative bargaining power of a party depends upon the mutual dependence of the partners and, in particular, on the exclusivity of the dependence (Emerson, 1962; Blau, 1964; Thompson, 1967). Thus, one’s bargaining power is determined by the alternatives available to it and by the significance of the stakes it has in the current relationship, and is reflected in the potential outcomes of bargaining (Cook, 1977; Bacharach and Lawler, 1984). In IJVs, this context-based bargaining power is affected by the viable alternatives available to each partner and by the strategic importance of the IJV to each of the partners. The party having more potential partners or alternative modal choices to enter a market achieves greater bargaining power because it can threaten to walk away from the current negotiation and to exercise its best alternative to a negotiated agreement (‘‘BATNA’’) (Fisher and Ury, 1981). Our use of the term ‘‘alternatives’’ here presumes that they are acceptable, i.e., they meet a minimum threshold of quality. There will be, of course, variations even among the acceptable alternatives. Therefore, the quality as well as the number of acceptable alternatives will influence a sponsor’s bargaining power such that a party who has alternatives will feel less need to make costly concessions during negotiations. In Propositions 1 and 2 below, we relate the number and quality of alternatives to management control. Proposition 1: Within an IJV, the greater the number of acceptable alternatives a partner has during the negotiations, the greater the management control this partner is able to achieve. Proposition 2: Within an IJV, the better the quality of alternatives a partner has during the negotiations, the greater the management control this partner is able to achieve. Not all IJV partners deem the partnership to be equally important to their overall strategic portfolio (Bartlett and Ghoshal, 1986). Firms who do deem the IJV to be of greater strategic importance will have a greater stake in the venture and may negotiate strongly for control. However, they are, in essence, exposing themselves to a greater risk that renders them more dependent on their partner and reduces their bargaining power accordingly. This reduction in bargaining power, in turn, may result in less control over the venture than they intended unless, of course, this partner takes additional strategic actions to offset this dependence (e.g., by making specific resource contributions, as seen below) or bargaining for specific but limited control of the IJV (Geringer, 1988; Mjoen and Tallman, 1997). This leads to Proposition 3. Proposition 3: Ceteris paribus, the more strategically important the IJV is to a partner, the more dependent this partner is on the other(s), and thus the less the management control this partner is able to achieve. A. Yan, B. Gray / Journal of International Management 7 (2001) 295–315 301 3.2.2. Resource-based bargaining power The second derivative of the power-dependence theory focuses on the resourcedependent relationships between the parties. Specifically, bargaining power in interorganizational settings derives from the possession or control of critical resources (Aldrich, 1977; Pfeffer and Nowak, 1976; Pfeffer and Salancik, 1978). According to Pfeffer and Salancik (1978, p. 27), for each organizational player in an interorganizational arrangement, ‘‘one of the inducements received for contributing the most critical resources is the ability to control and direct organizational action.’’ Thus, an IJV partner’s contribution in critical resources will enhance its bargaining power and, in turn, its management control (Harrigan, 1986; Root, 1988; Harrigan and Newman, 1990; Blodgett, 1991). Increasing empirical evidence has also rendered support for this relationship between resource-based bargaining power and control in IJVs (Lecraw, 1984; Yan and Gray, 1994; Child et al., 1997; Mjoen and Tallman, 1997). However, IJV partners contribute a variety of resources to the venture (e.g., financial capital, technology, market access, and managerial knowledge). As Yan and Gray (1994) and Mjoen and Tallman (1997) have argued, it is important to differentiate the effects of capital resources and of noncapital resources on control. Capital resource-based power is derived from contribution of financial resource or its equivalent in physical or proprietary properties. In contrast, noncapital-based bargaining power derives from a party’s contribution of critical tacit resources (Chi, 1994) including know-how, managerial expertise, marketing channels, and political networks. It has been common practice in the joint venture literature to assume that the structure of ownership (e.g., capital resource contributions) is a direct proxy for management control (Fagre and Wells, 1982; Blodgett, 1991). While there is theoretical evidence to support this contention, we believe it remains an empirical question — i.e., ‘‘Does putting more money into the IJV always result in more control?’’ We offer two separate propositions — one for capital resources and one for noncapital resources — because it is important to determine whether the contribution of noncapital resources can offset the presumed effect of equity on control. Proposition 4: Within an IJV, the more capital resources a partner contributes to the venture, the greater the management control this partner is able to achieve. Proposition 5: Within an IJV, the more noncapital resources a partner contributes to the venture, the greater the management control this partner is able to achieve. 3.2.3. The influence of governmental actors Of special importance in IJVs is an exogenous factor that affects the partner bargaining power — i.e., the role of local government as one of the major stakeholders in IJV negotiations (Brouthers and Bamossy, 1997; Mjoen and Tallman, 1997; Pan, 1996). At a general level, Boddewyn and Brewer (1994) argue that national governments represent ‘‘the key political actors’’ in international business (p. 124). Even in the world’s most developed countries, governmental influence on IJV formation can be substantial, as evidenced in the GM–Toyota venture (NUMMI) (Weiss, 1977). The role of local government is particularly 302 A. Yan, B. Gray / Journal of International Management 7 (2001) 295–315 significant for IJVs in developing and transitional economies, in which policy making is as much politically-as economically-based. Government restrictions on ownership structures, business sectors or industries to form IJVs, and the venture’s target markets have long been observed as critical factors in IJVs and foreign investment in general. For example, from the perspectives of Chinese politics and international political economy, Pearson (1991) explains why the Chinese government has preferred and promoted equity IJVs as an ideal form for absorbing foreign capital. Recent case studies of Western European IJVs in Hungary and Romania (Brouthers and Bamossy, 1997) reported that the local governments in transitional economies exerted significant influence on the relative bargaining power of the IJV partners at the prenegotiation, negotiation, and postnegotiation stages. The role of government influence is quite complex in IJVs. For example, anecdotal observations suggest that the relative bargaining power of an IJV partner will be enhanced as a result of the influence of its own government on the IJV negotiations. This does not always hold true, however. For instance, governments in less developed countries generally push IJVs to export in order to make much-needed foreign exchange. This type of influence does not necessarily align with the IJV’s local partner’s interests, and thus does not help the local partner gain any bargaining power. Sometimes, it may serve as a counterproductive factor for the local partner, because the MNC partner can always use its effort to satisfy or accommodate the local government’s policy constraints and requirements as a bargaining chip against the local partner. In all events, however, governmental forces, as an exogenous factor, may distort the endogenous balance in bargaining power between IJV partners, as well as the relationship between bargaining power and control, thereby moderating in some way the relationship between these two variables. When strong government intervention is present, uncertainties will occur in interpartner negotiations; as a result, bargaining power will become less predictive of the venture’s control structure. Because there are competing predictions about the direction of the government’s influence on these negotiations, we suggest that the following research question should guide future research: Research Question 1: Government influence on the IJV negotiations will moderate the relationship between bargaining power and control such that the stronger the government interference, the less predictive of control the relative bargaining power. We now turn our attention to the effect that the distribution of control in IJVs has on performance outcomes. For this analysis, we draw on transaction costs and agency theories to augment the bargaining power perspective. 3.3. The effect of control on performance How does the exercise of management control affect the performance of an IJV? This question has been a focus of inquiry among IJV researchers for more than a decade. Its pursuit, however, has generated ambiguous and perplexing results (Geringer and Hebert, 1989). As some authors point out (cf. Yan and Gray, 1994; Hebert, 1994), a critical factor in the inconsistency is the lack of a widely accepted definition of performance in IJVs. A. Yan, B. Gray / Journal of International Management 7 (2001) 295–315 303 The IJV literature reveals a variety of different conceptualizations of performance. As a result, considerable controversy exists among scholars and practitioners alike with respect to from whose perspective performance is evaluated, what appropriate performance measures are, and how different measures are useful in the different stages of the venture’s evolution (Yan and Gray, 1995). Following Yan and Gray (1994, 1995) we argue that the objectives of the IJV’s parents, taken as a whole, provide the best basis for performance conceptualization. Since joint ventures are formed to pursue each partner’s strategic interests, and each partner commits critical resources toward these ends, the degree to which these goals are satisfied constitutes an effective measure of performance. Key to our conceptualization is that successful performance means that both partners goals are satisfied, not just those of the MNC. Therefore, we suggest that performance should be understood in interpartner comparative terms. For example, this could be formulated as the ratio of the extent to which one partner’s objectives are satisfied relative to the others’ or a weighted average of the degree of satisfaction of the primary objectives of each partner (cf. Yan and Gray, 2001). Thus, if a joint venture is unable to meet the key expectations of both or either of its parents over a considerably long period of time, it would not be considered a high performer. Further, its ability to survive as constituted may become questionable (Gray and Yan, 1997; Yan and Luo, 2001). While many tests of the relationship between control and performance in joint ventures have been conducted (Geringer and Hebert, 1989; Hebert, 1994; Yan and Gray, 1994; Mjoen and Tallman, 1997), the empirical results have been conflictual, and we lack a unifying theoretical rationale for explaining this relationship. We believe that rationale stems from the fact that IJVs are mixed-motive games in which the partners are simultaneously engaged in cooperation and competition (Lax and Sebenius, 1986; Hamel et al., 1989). Whereas symbiotic interdependence (Astley and Fombrun, 1983) drives the partners to collaborate, competitive interdependence provides incentives for each partner to pursue its own interests. Therefore, we draw on transaction costs and agency perspectives to explain the competitive dynamics and theories of trust development to explain the cooperative dynamics. Together, these theories explain how control and performance are related. We draw on two concepts from transaction costs theory. The first is the notion of incomplete contracts and the second is opportunism. According to transaction cost theory, firms form joint ventures to overcome the uncertainties associated with the incompleteness of market contracts (Coase, 1937; Alchian and Demsetz, 1972; Crocker and Masten, 1988). However, a joint venture also represents a kind of incomplete contract in which the partners have to live with substantial uncertainties down the road (Crocker and Masten, 1988) — i.e., the outcomes of their cooperation will not be apparent until years. In order to minimize these uncertainties, IJV partners seek management control. In addition, each partner is vulnerable to opportunism (Williamson, 1975) potentially engaged in by its counterpart, and it is difficult, if not impossible, for each party to sort out ex ante who will be an opportunistic partner. Therefore, gaining management control can be considered as both a defensive and a proactive strategy. Used defensively, control can be exercised by a partner to overcome opportunism possibly engaged in by other partners (Hansen and Hoskisson, 1996). Since the partners do not have complete information about each other or 304 A. Yan, B. Gray / Journal of International Management 7 (2001) 295–315 about the future of the prospective IJV at its formation (Kogut, 1991; Chi and McGuire, 1996), their initial relationships resemble arm’s-length market transaction in which competition and prevention of opportunism are the norm (Williamson, 1991). The potential for opportunism exists until the partners develop a reputation of trustworthiness with each other (Parkhe, 1993b). Exercise of management control can also be used as a proactive strategy for IJV partners to attenuate uncertainty and to achieve their own strategic interests. Because IJVs are not a pure form of a hierarchical structure like the case of mergers or wholly owned subsidiaries, a complete elimination of selfish behavior is impossible (Williamson, 1985; Hennart, 1988; Chi and McGuire, 1996). Especially, as Chi (1996) argues, when a partner’s commitment cannot be precisely monitored or verified, this partner has an incentive to pursue its own interests at the expense of the interests of other partners or of the IJV. Newman (1992, p. 78) observed: ‘‘Each potential partner, thinking about its own wants and resources, would like the lion’s share of the benefits of the cooperative activity. Relative power comes into play.’’ This is particularly true when the partners have differing strategic interests for forming the IJV, and these interests are not perfectly compatible. To summarize, from the transaction costs perspective, exercise of management control by a partner enables it not only to alleviate the potential opportunism engaged by the IJV’s other partners, but also to use the IJV’s common stock of resources to pursue its own strategic interests. As a result, the achievement of this partner’s strategic objectives should be enhanced. Therefore, according to the transaction cost approach, if one partner has dominant control, this should affect performance by increasing the achievement of their particular objectives (over their partners). Agency theory can also shed light on the relationship between control and performance. An agency relationship exists when one economic entity (the principal) authorizes the other (the agent) to act on the principal’s behalf (Fox, 1984; Eisenhardt, 1989). Because of the inherent conflict between the self-interests of the principal and the agent, agency costs occur when the agent does not act in the best interest of the principal (Jensen and Meckling, 1976). At the more general level, agency problems are ‘‘metering problems’’ (Alchian and Demsetz, 1972) that occur when two economic entities, as a team, jointly produce output. Unless monitoring occurs, each team member will not necessarily pursue the best interests of the other member or those of the team as a whole, but will act opportunistically to pursue its own strategic interests (Moe, 1984). It is arguable that IJVs resemble such a team — ‘‘a team whose members act from selfinterest but realize that their destinies depend to some extent on the survival of the team in its competition with other teams’’ (Fama, 1980, p. 289). The team, in the case of IJVs, involves two or more partners jointly producing output (e.g., the joint venture’s products). The agency problem in IJVs is rooted in the divergent self-interests of the parents and their objectives for the venture’s operation. This is particularly true for IJVs created between developed and developing country partners. Each partner has strategic interests and objectives that are not salient for the other, but still they must rely on the other to achieve them. Therefore, each partner (the hypothetical principal) gives the other’s management personnel in the IJV (the hypothetical agents) authority to act on the former’s behalf (Fox, 1984). A. Yan, B. Gray / Journal of International Management 7 (2001) 295–315 305 Both transaction costs theory and agency theory predict that the partner with greater control of the IJV will use the common pool of resources to pursue its own interests (i.e., to achieve its own objectives) rather than those of its partner or the best interest of the IJV overall. Therefore, in effect, the management control structure becomes a critical vehicle through which decisions about whose objectives to pursue are made. As a result, an IJV with a dominant-control structure (Killing, 1983) would be expected to satisfy more of its dominant parent’s objectives than those of its nondominant parents. By the same logic, in shared-control IJVs (Killing, 1983), the extent to which the objectives of both partners are achieved should be relatively equal. To summarize, we hypothesize a direct, positive relationship between the degree of a partner’s control and the extent of achievement of its objectives compared with those of its partner(s). Proposition 6: The greater management control a parent exercises over the IJV, the more likely this partner will achieve its own strategic objectives for the joint venture over those of its partner(s). 3.4. The effect of the interpartner working relationship on performance So far we have proposed a direct relationship between the IJV’s control structure and the achievement of the partners’ objectives. However, other factors have also been posited to have an effect on IJV performance, and, to work in conjunction with control to influence IJV outcomes. Those scholars who argue that joint ventures are opportunity maximizing endeavors rather than only opportunism minimizing ones (e.g., Zajac and Olsen, 1993; Hansen and Hoskisson, 1996) as well as many other scholars have argued that the quality of the working relationship among IJV partners affects the overall performance (Davidson, 1982; Tung, 1984; Beamish and Banks, 1987; Koenig and van Wijk, 1991; Newman, 1992; Yan and Gray, 1994; Madhok, 1995; Child, 1997; Hebert, 1996). Two aspects of the partners’ working relationship are deemed important: interpartner trust and consensus or conflict about goals between the partners. 3.4.1. Trust Several theorists have argued that transaction costs explanations are insufficient to account for relational dynamics within joint ventures and that trust is another critical explanatory variable (Barney and Hansen, 1994; Zaheer and Venkatraman, 1995; Madhok, 1995; Nooteboom et al., 1997; Das and Teng, 1998). Multiple conceptions of trust have been considered in the literature. Ring and Van de Ven (1992) distinguish calculative forms of trust from confidence in another’s goodwill. Lewis and Weigert (1985) distinguish leaps of faith from trust based on reason and experience. Lewicki and Bunker (1995) identify three types of trust: calculus-based, knowledge-based, and identification-based trust. Calculative trust occurs when farsighted parties recognize the potential benefits of their continued interaction and expect that the other party will behave predictably (Williamson, 1993). In knowledgebased trust, one person relies on another because of direct knowledge about their behavior. Parties with identification-based trust develop a social bond with each other based on mutual 306 A. Yan, B. Gray / Journal of International Management 7 (2001) 295–315 appreciation of each other’s needs. Distinguishing calculative from other forms of trust appears particularly useful for understanding how trust works in joint ventures. Development of trust among IJV partners can have a direct positive effect on performance. For example, if both partners exhibit what Barney and Hansen (1994) refer to as ‘‘strong form trust,’’ they can reduce the costs of governance mechanisms that would be required for lesser forms of trust and exploit exchange opportunities afforded by it, thereby gaining competitive advantage. Strong form trust is exogenous to an alliance’s governance structure and is derived instead from values, principles, and standards that the partners share. Thus, it is akin to Lewicki and Bunker’s ‘‘identity-based trust.’’ The presence of such trust should enable the parties to work out ambiguities in the contract, correct errors, cope with uncertainty, solve problems better (Crocker and Masten, 1988; Mohr and Spekman, 1994), and work to achieve integrative outcomes that allow all parties to satisfy their objectives (Pruitt and Lewis, 1977; Fisher and Ury, 1981; Lax and Sebenius, 1986). Mohr and Spekman (1994) found evidence of the effects of such trust satisfaction with profit in strategic alliances between automobile manufacturers and dealers. Similarly, Saxton (1997) demonstrated a positive relationship between shared decision making (indicative of trust) and performance. Therefore, we offer Proposition 7. Proposition 7: The presence of a trusting relationship among IJV partners will have a direct, positive effect on the IJV’s performance. Another way that trust can operate in IJVs is via an interaction effect with control. If trust is present, it can cut transaction costs by reducing the need for formal contracts (Bromiley and Cummings, 1995; Hansen and Hoskisson, 1996) and serve as an alternative mechanism to guard against opportunism (Hill, 1990; Barney and Hansen, 1994; Zaheer and Venkatraman, 1995). Both trust and control contribute to partners’ confidence that their counterpart will ‘‘pursue mutually compatible interests in the alliance, rather than act opportunistically’’ (Das and Teng, 1998, p. 491). Consistent with this, Nooteboom et al. (1997) showed that trust reduced the probability of perceived loss for alliance partners. It appears, then, that control and trust may interact to affect performance. For example, in a case study of the Nantong Cellulose Fibers Company, Newman (1992) showed that trust played a major role in the willingness of the U.S. partner to accept a minority equity ownership and to transfer responsibility for its IJV’s operations to the Chinese parent. In a study of Canadian manufacturing IJVs, Hebert (1996) found that trust was positively related to performance in dominant but not in shared-control IJVs. Additionally, in a study of North American–Japanese IJVs, trust only had an indirect effect on performance (Inkpen et al., 1997). Moreover, trust may influence performance differently under different control conditions. In shared-control IJVs, where trust is necessarily higher, control may be sufficient to predict performance. In dominant-control IJVs, however, trust may be a necessary companion of control, if high levels of performance are desired. This relationship was confirmed by research that found a positive association between trust and quasi-integration between independent insurance agencies and insurance companies (Zaheer and Venkatraman, 1995). A. Yan, B. Gray / Journal of International Management 7 (2001) 295–315 307 Therefore, we propose that the interaction of trust and control will influence performance as Proposition 8 states. Proposition 8: A trusting relationship between the partners will moderate the linkage between parent control and IJV performance such that the stronger the interpartner trust, the weaker the effect of control on performance. It is important to note, however, that trust between the IJV partners can change over time (Hamel, 1991; Yan and Gray, 1994) and that its relationship to IJV performance may be reciprocal longitudinally (Killing, 1983; Gulati, 1995; Zaheer and Venkatraman, 1995). We take up this issue in the discussion of future research below. 3.4.2. Consensus or conflict about goals One ingredient in a superior working relationship between the partners, and particularly, between the two groups of managers nominated by the local and foreign partner, respectively, is similarity in operating philosophies (Narus and Anderson, 1987; Hill and Hellriegel, 1994; Yan and Gray, 1994). Addressing interfirm relationships, Ring and Van de Ven (1994) note that it is pivotal for the participating firms to create consensus on the key cultural expectations, purposes, and values that govern the interfirm arrangement. Such consensus, according to these authors, serves as ‘‘psychological contracts among parties’’ (p. 101) and increases the partners’ formal commitment to the cooperation. To the extent that the partners have a consensus on the IJV’s mission, goals, and operating procedures, less coordination among the partners is needed, opportunism and monitoring costs will decrease, and the overall chances of IJV success will improve as a result. Das and Teng (1998, p. 506) explain, Participatory decision making serves the purpose of controlling, because in the process partners interact among themselves to gain a better understanding of each other. As a result, collective norms and values of the alliance are developed. Because the goal-setting process allows partners to form a consensus gradually, their incentive to deviate from agreed-upon objectives tends to be significantly curbed. If, on the other hand, partners experience considerable conflict in working together, they are less likely to reach decisions that they both can support (Mohr and Spekman, 1994). Conflict between the partners can indicate disagreement over goals, operational and managerial expectations, send confusing signals to the IJV managers and employees (Lyles and Salk, 1997), and thereby hamper performance levels (Tillman, 1990; Anderson and Narus, 1990). While Hebert (1996) found that the level of conflict was negatively related to performance, the relationship only held for dominant, but not shared-control IJVs. Mohr and Spekman (1994), on the other hand, found direct positive relationships between conflict resolution and partner satisfaction. We suspect that conflicts can jeopardize performance in any joint venture, but that some IJVs may be better able than others to find integrative resolution to such conflicts. These ideas are reflected in Proposition 9 (a and b): Proposition 9: Unresolved interpartner conflict over (a) the IJV’s mission and goals and (b) its operational procedures will be negatively related to performance of the IJV. 308 A. Yan, B. Gray / Journal of International Management 7 (2001) 295–315 Fig. 1. A conceptual model of parent control in international joint ventures. It also seems likely that trust and goal consensus or conflict are related. One would expect that, at least to a point, consensus about goals would lead to increased trust whereas continued conflict over goals would diminish trust and vice versa. Consensus about goals, however, may be unrealistic, since one reason that partners form IJVs is to capitalize on their differences. Still, if the partners reach integrative agreements, trust should increase. The possible negative and reciprocal relationship between trust and unresolved conflict in IJVs warrants further research. In Fig. 1 we provide a model to summarize all the relationships suggested in our propositions and research questions. 4. Implications and future research 4.1. Contributions and implications for understanding IJVs In this paper we have developed a conceptual model of the determinants and effects of control in IJVs, which helps to overcome the controversy in the extant literature about how control is decided, how it is exercised, and how it impacts IJV performance. We posit an interpartner bargaining power perspective on IJV control that draws upon power dependence, agency and transaction costs theories, and theories about trust to explain these aspects of control. While acknowledging that IJV partners may desire to control the IJV, we stress that it is critical to acknowledge the interests of both partners, as well as the host government, and how the potentially competing interests of these parties are reconciled. We propose that the IJV’s partners must negotiate their respective intentions and reach some accommodation about who will exercise control and how. In addition to the partners’ sheer desires for control, several factors can influence the outcome of these negotiations including the resources the A. Yan, B. Gray / Journal of International Management 7 (2001) 295–315 309 partners contribute to the IJV, the host government’s stipulations, and the alternatives available to the partners. Our perspective on control respects both partners’ roles in determining the IJV’s control structure, considers the relative power and control of the partners, and treats the IJV as an arena in which the partners interact, rather than as solely a quasi-subsidiary of the MNC parent. A complete theoretical explanation for the determinants of control in IJVs rests on the integration of the strategic intention (Tomlinson, 1970) and the bargaining power perspectives. Thus, the division of control among IJV partners is a result of the interaction between what a partner wants and what it can obtain (Blodgett, 1991; Tallman and Shankar, 1994). The former corresponds to an IJV parent’s desire for control, whereas the latter depends on its relative bargaining power vis-à-vis its partner. Thus, a parent’s control in the venture can be seen as a compromise between its ‘‘wants’’ and its ‘‘ability to get what it wants.’’ Longitudinally, we expect that the two perspectives converge: A partner can increase its bargaining power to achieve its unmatched strategic intentions over time, whereas the formulation of new strategic intentions can only be done in the context of the current balance of bargaining power between the partners. Our model also raises an alternative explanation for why partners contribute strategic resources, an issue of both theoretical and practical importance (Chi, 1994). Previous research on IJVs argues that MNCs tend to minimize their resource contributions to IJVs in order to maintain maximum appropriability of these resources and to minimize opportunism by the learning-oriented local partner (Hamel, 1991). Thus, it adopts a conservative and defensive stance recommending that the MNC only increase its ownership holdings in the IJV in order to protect its nonequity resources (Blodgett, 1991). Although this approach may enable the partner to protect its resource contribution, it does not address the partner’s need for exercising control over the IJV’s strategy or operations. The model we offer in this paper, on the other hand, adopts an offensive strategy, committing resources necessary to gain a desirable level of control over the entire operation of the IJV (Harrigan, 1986) or its key functional areas (Killing, 1983; Hebert, 1994), not just over the protection of resources. Although an IJV partner can use resources strategically to enhance the negotiations over control, the negotiated outcome will reflect other contingencies as well, such as government pressure and context-based bargaining power. The strategy of increasing equity holdings to protect nonequity resources, for example, is not always possible because the IJV’s ownership split may be constrained by local government stipulations. The bargaining power perspective, on the other hand, allows for the possibility of gaining dominant management control over the IJV’s operation and appropriability of the resources with 50% or less ownership, an outcome that is especially relevant for MNCs forming IJVs in developing countries (Beamish, 1988). Other advantages of the bargaining power model are that it treats IJVs as a truly joint organizational effort (instead of a quasi-subsidiary of the MNC parent), regards both partners as equally critical to IJV success, and focuses on the partners’ relative positions and interactions in the IJV. We deem this shift of focus both theoretically and managerially important because it fits the trend of the globalized economy in which international businesses are conducted via multilateral negotiations rather than an imperial practice in 310 A. Yan, B. Gray / Journal of International Management 7 (2001) 295–315 which MNCs from the developed world impose control over their exchange partners from developing countries. The bargaining power model acknowledges both competitive and cooperative dynamics that occur simultaneously in IJVs (Hamel et al., 1989; Zajac and Olsen, 1993), allows for the possibility of integrative as well as distributive outcomes (Lax and Sebenius, 1985), and acknowledges the potential benefits that accrue from a positive working relationship among the partners. We suggest that previous, inconsistent results for the relationship between control and performance may be explained by the interaction between trust and control. In effect, trust may be a necessary supplement to formal control to ensure high levels of performance under some circumstances. Trust not only serves as a safeguard against opportunism, but, coupled with productive conflict resolution, it also enables the partners to capitalize on synergies and to generate creative opportunities that provide competitive advantage (Barney and Hansen, 1994; Hansen and Hoskisson, 1996). 4.2. Future research directions As a key direction for future research, we would like to stress the dynamic nature of control in IJVs. Although its underlying premises are dynamic (particularly when it is used at multiple times), the model, as we presented it, remains static and captures only a snapshot picture (e.g., at the IJV’s founding). Since IJVs are extremely dynamic and notoriously unstable, calls for research on the dynamic development of IJVs have been made by a number of scholars (e.g., Wood and Gray, 1991; Parkhe, 1993a; Yan and Gray, 1994; Doz, 1996). Change in partner bargaining power can result from several factors associated with the context in which the IJV is operating, the IJV’s performance or the partners themselves. For example, shifts in context-based power can result when a partner’s strategic stakes in the venture change, or when potential new alternatives become more attractive than continuing the IJV. Yan and Gray (1994) observed in one of their case studies that as one partner’s other business operations suffered severe losses, its interest in a profitable IJV became strategically more significant. Similarly and obviously, a partner can gain or lose bargaining power as it increases or decreases its resource contributions to the IJV, respectively. Shifts in bargaining power can also occur because of interpartner learning (Vernon, 1977; Hamel, 1991; Inkpen and Beamish, 1997), in which strategic resources and tacit knowledge, in particular, transfer between the partners or between a particular parent and the venture. However, an increase or decrease of one partner’s bargaining power may be insufficient to precipitate a shift in control because the change may be offset by similar changes in the other partner’s bargaining power over the same period of time (Yan and Gray, 1994). The control structure will change only when significant shifts occur in relative bargaining power and partners elect to use this leverage to increase their control over the IJV (Gray and Yan, 1997; Yan, 1998). A dynamic theory of IJVs should also consider other factors that can produce change such as a shift in the IJV’s performance (Killing, 1983; Yan and Gray, 1994; Gray and Yan, 1997), construction and destruction of trust, changes in government intervention, and the effect of organizational inertia. As noted earlier, trust may be an outcome, as well as an antecedent of A. Yan, B. Gray / Journal of International Management 7 (2001) 295–315 311 superior performance or successful prior experience. As noted by Gulati (1995), trust emerges from repeated alliances among the same partners. Since the conceptual model is subject to future empirical tests, here we would like to offer some suggestions for testing the proposed theoretical model. We specifically consider methodological issues concerning data collection, operationalization and measurement. Since IJVs involve at least three individual organizational entities — a foreign parent, a local parent, and the venture’s management, multisource data collection is necessary. For accurate data on the context-based and the resource-based components of bargaining power, ideal informants (interviewees or survey respondents) would be those who personally participated in the venture’s founding and subsequent negotiations. Measuring management control is a complex task because it deals with control at different levels (e.g., strategic control, operational control, structural control, as Yan and Gray, 1994 suggested) and on different dimensions (scope, extent, mechanisms, and overall control, as Geringer and Hebert, 1984 and Hebert, 1994 proposed). Whatever indicators of control are adopted, it is our strong recommendation that bargaining power and control be measured on an interpartner comparative basis. As we stressed in the paper, power and control are necessarily relative concepts. The absolute amount of power or control a particular partner possesses without considering that of the other partner is not meaningful. In fact, lack of consistency between conceptualization and operationalization may be a main factor in the inconsistent previous findings. With respect to performance, it has been well documented that IJV partners may have different goals and objectives (Yan and Gray, 1994; 1995; Osland and Cavusgil, 1996), and each may consider some performance measures as extremely relevant and critical, while other measures unimportant or irrelevant. We suggest that future empirical studies use multiple measures that incorporate multiple parties’ perspectives. While it is pivotal to consider the parent firms’ key interests, it is also critical to incorporate the operational goals and objectives of the IJV’s management, as a separate organizational entity. Finally, in order to tease out the temporal effects of the model’s variables, longitudinal studies of IJVs become an imperative. References Alchian, A.A., Demsetz, H., 1972. Production, information costs, and economic organization. Am. Econ. Rev. 62, 777 – 795. Aldrich, H.E., 1977. Visionaries and villains: the politics of designing interorganizational relations. Organ. 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