International Joint Venture part 2 Essay - 4,113 words

... While no studies, of which we are aware, provide good empirical evidence of the relationship between organizational climate similarity in companies that are considering working together and the resulting performance, a few studies on mergers and acquisitions (related, but not identical, to IJVs) provide preliminary empirical support related to the question of organizational climate similarity, and are thus worth noting. Most of these studies (all dealing with mergers and acquisitions) were case studies or studies primarily based on anecdotal evidence (e.g. Costello et al. 1963; Gaves 1981). Some of them have also assisted with theory building on the importance of organizational similarity (e.g. Buono and Bowditch 1989; Buono et al.


1985; Jemison and Sitkin 1986; Nahavandi and Malekzadeh 1988). For example, Jemison and Sitkin (1986) theorize that there is a relationship between organizational climate similarity between the two firms involved in an acquisition bears and the ability of the new organization to integrate its daily activities after the acquisition. In addition, Buono and Bowditch (1989: 134) hypothesize that differences in management styles are a major reason why mergers and acquisitions often fail to achieve the performance level predicted by feasibility studies. Three empirical studies focusing on mergers and acquisition deserve special mention. Calori and Sarnin (1991) concluded, based on a three-year study of French firms, that growth in sales is linked to national cultural homogeneity. Datta (1991) demonstrated that differences in top management styles have a negative effect on post-acquisition performance. Finally, Chaterjee demonstrated that shareholder gains were inversely related to perceived corporate cultural differences in acquisitions. Below, we use transaction cost theory to explain in more detail why we believe that similarity in organizational climate is important for IJV performance.


Transaction cost theory has previously been used to show that joint ventures can be an optimal form of governance (for scope joint ventures, see Beamish and Banks 1987; and for scale joint ventures, see Hennart 1988). However, not all joint ventures are born equal. In this paper, we are concerned about using transaction cost theory to explain which types of joint ventures are likely to incur lower organization costs, and thus perform better. It is sometimes forgotten that Williamson (1975) investigated aspects of the optimal way to design a firm inside one organizational form. For example, Williamson concludes that the number of people a person can manage effectively is limited, because of issues of bounded rationality. Brown have extended the above line of within-mode transaction cost theory and applied it to joint ventures. They use transaction cost reasoning to hypothesize that dissimilarity of national and organizational cultures between joint venture parents is likely to lead to joint venture failure. Their main argument is that as organizational and national culture dissimilarity between parent firms increases, opportunism is also likely to increase.


This increase in opportunism will, in turn, increase the organization costs associated with using such a JV. Their paper, however, does not have an empirical section. This study expands on the above type of transaction cost analysis and examines how one key decision in designing a joint venture -- partner selection (for a discussion of partner selection criteria see Geringer 1988) -- can affect the organizational costs encountered in employing a joint venture and thus a joint venture's performance. The characteristic of partners focused on here is the degree of organizational climate dissimilarity. The key concern for this study is whether joint ventures between partners having more dissimilar organizational climates experience different organizational costs, which would, in turn, impact overall firm performance. Depending on the degree of organizational climate dissimilarity present in a joint venture, several items cause joint ventures to experience different levels of organizational costs: avoiding process losses, decreasing uncertainty, and decreasing the risk of opportunistic behavior.


Each of these items will now be discussed in greater detail. When firms work together, it is desirable that they have similar organizational climates, since this homogeneity avoids process losses in co-ordination and control that are normally associated with diversity. Differences in organizational climates of firms trying to work together have been shown to lead to differences in management practices and values. These differences may, in turn, lead to cultural ambiguity and process losses when people from different organizational climates work together (Buono et al. 1985). In turn, these process losses increase the cost of conducting a transaction. Process losses may result from a variety of different situations.


For example, process losses may result from one parent firm not being able to understand what another parent firm does, because of ineffective communication between the two firms (organizational communication flow is a dimension of organizational climate). This ineffective communication may result from the parent firms' organizational climates being so different that it is hard for the firms to know how to relate to each other. For example, firm A may be very hierarchical, with upper management approving most decisions, while firm B may have few levels of hierarchy and workers who are empowered to make decisions. A worker in firm B might try to ask a worker in firm A about his opinion on a certain issue. However, the worker in firm A may be reluctant to give his opinion, without first consulting his manager. The worker in firm B may misinterpret this reluctance as an attempt not to co-operate.


This misinterpretation may, in turn, lead to retaliation of workers in firm B, or at least frustration at the firm A worker's unwillingness to co-operate. Clearly, the troubles caused by the two firms' differing communication patterns will increase the organizational costs of using the joint venture described above, compared to a joint venture where both parents have similar communication flow patterns. Process losses may also result, because one firm's organizational climate is more oriented towards talking risks, than is the other firm's. Thus, it is desirable that parties involved in a joint venture have similar organizational climates, so that they can avoid such process losses and minimize organizational costs. Much uncertainty relating to transactions results from measurement difficulties (Barzel 1982; Ouchi 1980; Williamson 1994). For example, it is often difficult to know how to value or measure the worth of a firm's contribution to a co-operative project. For example, a local firm may promise to provide its potential foreign partner with many potential customers and w ...................................................................................................................................................................................................................................................................................................................................................................

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Essay Tags: joint venture, organizational, venture, joint, climate

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