The determinants of foreign partner's equity ownership in Southeast Asian joint ventures

ARTICLE IN PRESS international business review International Business Review 16 (2007) 177–206 www.elsevier.com/locate/ibusrev

The determinants of foreign partner’s equity ownership in Southeast Asian joint ventures Daniel C. Indroa, Malika Richardsb, a

School of Graduate Professional Studies, Penn State University—Great Valley, Malvern, PA 19355, USA b Penn State University—Berks, Reading, PA 19610, USA Received 28 March 2005; received in revised form 5 January 2007; accepted 19 January 2007

Abstract Using a sample of 375 equity joint venture agreements between 2 partners in 6 Southeast Asian countries, we document the active role of Asian companies in driving the flow of joint venture activity in this region and provide a comparative analysis of joint ventures in transitional and nontransitional Southeast Asian countries. Specifically, we analyze the relationship between the foreign partner’s equity ownership and partner uncertainty, the types of joint venture activities, and the frequency of transactions between the joint venture partners. In addition, we show that the relationship between the foreign partner’s equity ownership and partner uncertainty, as proxied by cultural dissimilarity, depends on the types of joint venture activities. In the case of Vietnam, a transitional economy, the evidence suggests that, in the presence of a weak legal and regulatory system, foreign firms are entering the country on a smaller scale and are more prone to informal, relational contracting as a substitute for legal enforcement. r 2007 Elsevier Ltd. All rights reserved. Keywords: Equity joint ventures; Foreign equity ownership; Southeast Asia; Transitional economies

1. Introduction Fortune 500 companies frequently use joint ventures as a form of organizing economic activities in developed countries (Harrigan, 1985; Janger, 1980).1 Multinational corporations Corresponding author. Tel.: +1 610 396 6096; fax: +1 610 396 6026.

E-mail addresses: [email protected] (D.C. Indro), [email protected] (M. Richards). Lynch (1989) defines a joint venture as ‘‘a cooperative business activity formed by two or more separate organizations y that creates an independent business entity and allocates ownership, operational responsibilities, and financial risks and rewards to each member, while preserving their separate identity/autonomy’’. 1

0969-5931/$ - see front matter r 2007 Elsevier Ltd. All rights reserved. doi:10.1016/j.ibusrev.2007.01.006

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also use joint ventures when operating in developing countries Vaupel and Curpan (1973), even when the host country does not require the use of joint ventures with a local company as a condition of market entry (Beamish, 1984). The joint venture literature maintains that a joint venture formation is justified when synergy exists between the 2 contracting parties (Contractor & Lorange, 1988; Root, 1988) and there are transaction costs or information asymmetry problems that make outright acquisition of the other party economically infeasible (Balakrishnan & Koza, 1993; Buckley & Casson, 1988, 1996; Gomes-Casseres, 1996; Hennart, 1988). Despite the popularity of joint ventures as a form of economic organization, there is limited study of joint ventures in the emerging Asia Pacific countries. Most joint venture studies in the emerging markets of the Asia Pacific region focus on China as the joint venture location (Chen & Hu, 2002; Chen, Hu, & Hu, 2002; Chen, Hu, & Shieh, 1991; Hu & Chen, 1993, 1996; Li, Lam, & Qian (2001); Luo, 2002; Meschi, 2004; Pan & Li, 2000; Pan, 1996, 2002; Tsang, 2002). Other emerging countries in the Asia Pacific region have received very limited attention (e.g., Aswicahyono & Hill, 1995; Lasserre, 1999). Three factors motivate our focus on the Southeast Asian economy. First, when venturing overseas, companies tend to pay special attention to the size of the foreign markets. Feldman (1992) reports that 76% of 110 Asian–American ventures surveyed mentioned that access to new markets is the primary objective. As a result, the substantial focus on China is understandable considering the potential size of its market. Academic interest in China largely follows from this increasing business focus on China. However, Schlosstein (1991) argues that Southeast Asian countries—more specifically, Indonesia, Thailand, and Malaysia—represent the New Little Dragons, as they were laying a solid foundation for economic takeoff, to follow the previous Little Dragons (Korea, Taiwan, Singapore, and Hong Kong). Indeed, the World Bank statistics on average GDP per capita growth for over 200 countries over the 1990–1999 period indicate that of the top 15 countries for which complete data is available, 5 of them are Southeast Asian countries (Singapore, Thailand, Vietnam, Indonesia, and Malaysia). The high GDP per capita growth of the Southeast Asian countries implies an increasing standard of living that potentially gives these countries’ citizens greater purchasing power. As such, the Southeast Asian countries are likely to represent significant business opportunities. Second, despite their geographical proximity, the Southeast Asian countries are quite diverse in terms of their economic development, political system, culture, and ethnicity (Lim, 1996). As a result, the Southeast Asian countries offer a rich laboratory to study the ownership structure of joint ventures with foreign partners. Third, anecdotal evidence suggests that developing nations in Asia that previously benefited from foreign investment are becoming foreign investors themselves. For example, Biers (1994) shows that Malaysian, Thai, and Indonesian companies started to invest in China and Vietnam. In fact, as of 1994, Malaysia was the 6th largest investor in Vietnam, while Thailand and Indonesia ranked 12th and 13th, respectively, ahead of the US The growing economy of India has also attracted investments from the Southeast Asian countries (Day, 2004). As a result, the Southeast Asian countries may represent, not only a significant business opportunity, but also the drivers of economic growth in Asia. Only recently, have academic researchers started to focus their interests on these Southeast Asian countries as important foreign investors in China (Chen, Hu, & Hu, 2002). In this study, we empirically examine a sample of 375 joint ventures established in 6 Southeast Asian countries between 1990 and 1999. We focus on joint venture agreements

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involving 2 partners (1 local and 1 foreign) and examine the determinants of the foreign partner’s equity ownership in the venture. We analyze the relationship between the foreign partner’s equity ownership and partner uncertainty, the types of joint venture activity, and the frequency of transactions between the joint venture partners. Previous studies (e.g., Blodgett, 1992; Geringer & Hebert, 1989; Merchant & Schendel, 2000) have shown that equity ownership in a joint venture is an important determinant of its performance. Root (1988) argues that joint venture partners tend to use equity ownership to control the venture operations despite the availability of other means of control. Because the allocation of equity ownership represents the partners’ control over the venture (Blodgett, 1991; Fagre & Wells, 1982), determining an equitable allocation of ownership in joint ventures is likely to depend on the degree of trust between partners, the risk of the operations, and other venture-specific operational factors. We make several contributions to the joint venture literature. First, instead of focusing on one emerging market, our study covers joint ventures in multiple (mostly emerging) economies with heterogeneous political systems and economic development. Also, because 1 of the countries in our sample (Vietnam) is a transitional economy, we are able to provide a comparative analysis of joint ventures in transitional and non-transitional economies. Interestingly, the Southeast Asian economies enjoyed a remarkable growth in the early part of the sample period, and suffered a severe crisis towards the end of the sample period. Second, our sample is not limited to only large multinationals or to companies in 1 industry or from 1 country. Rather, our sample includes publicly traded and private firms from 30 countries. In addition, some of the public firms were members of the Fortune Global 500 in the year the joint venture was announced. Third, we document the active role that other Asian countries play in the flow of FDI activity in Southeast Asia. Fourth, our empirical analysis provides intriguing evidence regarding the interaction effect of behavioral uncertainty and asset specificity on the foreign partner’s equity ownership in the venture. 2. Related literature and hypothesis development Transaction costs analysis (Williamson, 1975, 1985) underlies the majority of joint venture ownership studies (e.g., Anderson & Gatignon, 1986; Buckley & Casson, 1998; Hennart & Larimo, 1998, among others). The basic principle of transaction costs analysis is that firms choose a governance structure that minimizes total transaction costs. Transaction costs include the costs of negotiating a contract, monitoring the venture performance, and monitoring the behavior of the contracting parties. Transaction costs analysis has 3 important dimensions: asset specificity, uncertainty, and transaction frequency. Asset specificity refers to the degree to which alternative users can redeploy the assets used in the transaction to alternative uses without sacrificing the assets’ productive values. A higher degree of asset specificity decreases the asset’s redeployability, resulting in a greater degree of bilateral dependency and contractual hazard between the transacting parties. Uncertainty signifies the extent to which the environment surrounding the transaction is difficult to predict. Within the context of entering a market/country, a high degree of uncertainty is likely to lead to the use of low-control entry mode because it will be highly costly to write and enforce a contract that specifies all eventualities and their consequent response. Transaction frequency represents the degree to which a transaction

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requires constant monitoring effort. In the presence of asset specificity, transaction frequency favors hierarchy over market (Williamson, 1985). 2.1. Cultural dissimilarity Trust between the partners is a critical component of the venture’s success. Das and Teng (1998) argue that equity ownership is a manifestation of the level of trust between partners. Because equity ownership implies a certain degree of control over the venture, a fair division of ownership becomes more complicated when the joint venture partners come from culturally different backgrounds. In such a case, they are likely to view division of equity ownership differently due to differences in their social norms, shared beliefs and values. Cultural similarity tends to reduce frictions and information costs between the 2 partners, and hence, lower the transaction costs. In Anderson and Gatignon (1986) terminology, cultural dissimilarity represents internal uncertainty associated with the venture. There is no clear consensus in the existing literature as to the impact of cultural similarity on the level of foreign partner’s equity ownership (Anderson & Gatignon, 1986). Li et al. (2001) document no significant effects of cultural similarity on the percentage of ownership in joint ventures in China. However, one can argue that the foreign partner should exert less control when there is a greater cultural difference between the foreign partner’s home country and the venture’s location because internal uncertainty is high in such a circumstance (Goodnow & Hansz, 1972). On the other hand, Pan (1996) finds that the foreign partner is more likely to hold equal or majority ownership when cultural distance is high because being foreign gives the foreign partner the latitude to do things differently (Richman & Copen, 1972). Anderson and Gatignon (1986) maintain that both arguments are consistent with transaction costs analysis. Therefore, H1. The foreign partner’s equity ownership is significantly related to cultural dissimilarity. The relationship between cultural dissimilarity and the foreign partner’s equity ownership is likely to differ in transitional and non-transitional economies. Countries in transition to a market economy are likely to have higher economic and political risk, and at the same time are unlikely to have an adequate legal system to enforce contracts. The inadequate support for legal enforceability of a contract makes joint venture contracting in a transitional economy more risky than that in a non-transitional economy. Nevertheless, because it may be worthwhile to engage in a joint venture with a local partner in a transitional economy (due to access to new market opportunities, for example), a foreign partner cannot rely on the legal system to protect its interests. Rather, the foreign partner is likely to use a non-legal approach to protect its interests. In particular, because culture affects how people behave and make decisions (Scarborough, 2001), understanding it will help the foreign partner to not only better infer the local partner’s motivations, expectations, and objectives, but also to find ways to induce cooperative behavior. This issue is likely to be more important in Vietnam than in the other Southeast Asian countries due to the transitional nature of its economy. Hence, we propose that H1a. The relationship between the foreign partner’s equity ownership and cultural dissimilarity is stronger in Vietnam than in the other Southeast Asian countries.

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2.2. Type of joint venture activity Transaction costs analysis identifies 4 types of asset specificity: site specificity, physical asset specificity, human asset specificity, and dedicated assets (Williamson, 1985). In general, when transaction-specific assets are valuable, firms are better off taking full ownership of a venture because opportunistic behavior can be curbed by exercising legitimate authority over the firm’s own employees. Proprietary assets are very valuable to their owners. However, some proprietary assets are easier to codify than others. Proprietary assets that involve tacit knowledge are costly to transfer through a contract. When taking full ownership of a venture is infeasible, firms will choose an equity joint venture to take advantage of the existence of such assets. The consensus among existing studies of multinational firms’ investments in foreign markets is that firms will exercise a high degree of control when they have a high level of proprietary assets (e.g., Gatignon & Anderson, 1988; Gomes-Casseres, 1989; Padmanabhan & Cho, 1996). Anderson and Gatignon (1986) contend that the degree of control depends on the nature of the asset specificity problem. For example, they argue that a high degree of control is more efficient for highly proprietary products or processes, when the products or processes are ill-structured, or when the products are tailored to the end users. On the other hand, a lower degree of control is more appropriate for more mature products. Williamson (1985) also argues that the effect of uncertainty on governance structure is conditional. When asset specificity is low, uncertainty is of little importance. In this case, a low control mode is preferred. However, adaptive capabilities of the contracting parties become necessary when asset specificity exists to a non-trivial degree. Without the proper form of governance, a higher degree of uncertainty creates costly haggling and maladaptation. Behavioral uncertainty, one that is attributable to opportunistic behavior, complicates the asset specificity problem. Because the tendency for opportunistic behavior increases with cultural differences (Glaeser, Laibson, Sheinkman, & Soutter, 2000), the severity of the asset specificity problem depends on the cultural dissimilarity between the 2 partners. Joint ventures between foreign and local partners may involve manufacturing, marketing, research and development (R&D), or a combination of these 3 activities. Different types of joint venture activities present the venture partners with different asset specificity problems. Manufacturing and R&D joint ventures are quite likely to involve investment in physical facility and transfer of technology, production processes, or tacit knowledge from the foreign partner to the local partner. High cultural dissimilarity between partners tends to increase the communication costs associated with this transfer of tacit knowledge. To minimize transaction costs, the foreign partner would rather have a lower equity stake. At the same time, the local partner also possesses his own advantages vis-a`-vis the foreign partner, in the form of access to raw materials or cheaper labor, and the ability to deal with the government bureaucrats. When cultural dissimilarity is high, endowing the local partner with a higher equity stake in the venture will provide the local partner with proper economic incentives to achieve the common joint venture goals. On the other hand, marketing joint ventures rely on the local partner’s channel of distribution and knowledge of the local market. As such, most of the costs associated with accessing the local market have been incurred by the local partner. In this case, it is the local partner who possesses the proprietary knowledge. When cultural dissimilarity is high, the local partner’s knowledge of the local market will help the foreign partner to sell its

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product in the local market. Nevertheless, the foreign partner also has advantages that the local partner is unlikely to have, such as a global brand name or reputable products to sell in the local market. The foreign partner naturally has a strong incentive to maintain this reputation. For the local partner, agreeing to accept a lower equity ownership is better than refusing to engage in the venture (as a result of not getting a higher equity ownership), because it is then able to spread the sunk costs of its channel of distribution and local market knowledge to a larger product base. For the foreign partner, having a greater equity stake in the venture allows this partner to share in the gains associated with selling in the local market. We therefore propose that H2a. The foreign partner’s equity ownership is lower when there is a greater cultural dissimilarity between partners and the joint venture engages in manufacturing or R&D activity. H2b. The foreign partner’s equity ownership is higher when there is a greater cultural dissimilarity between partners and the joint venture engages in marketing activity. We are also likely to observe a different relationship, described in Hypotheses 2a and 2b above, for joint ventures located in transitional and non-transitional economies. Recognizing that the impetus for growth and industrialization should come from an internationally competitive and efficient manufacturing sector, the government of Vietnam has put in place various incentives for foreign investors (Economist Intelligence Unit, 1999) and encouraged investments in the manufacturing sector Thornton (2003). As a result, we can expect that H2c. There is a stronger negative relationship between the foreign partner’s equity ownership and cultural dissimilarity between partners for joint ventures involving manufacturing or R&D activity in Vietnam than in the other Southeast Asian countries. H2d. There is a weaker positive relationship between the foreign partner’s equity ownership and cultural dissimilarity between partners for joint ventures involving marketing activity in Vietnam than in the other Southeast Asian countries. 2.3. Frequency of prior collaboration Trust between firms is likely to affect the choice of contracts between them. A big concern of firms entering into joint ventures is the unpredictability of their partners’ behavior. While a detailed contract is one way to make behavior more predictable, it is costly to write because it is impossible to specify all possible unforeseen contingencies. The assessment of transaction costs associated with an alliance can depend on the presence of trust that emerged from prior collaboration. When 2 joint venture partners have no prior collaboration with each other, the level of trust between partners tends to be low, which results in high transaction costs. In their 7-country study, Huff and Kelley (2003) find that individuals in collectivist societies tend to trust in-groups more than out-groups, suggesting that propensity to distrust outgroups is higher in the collectivist than in the individualist societies. Their empirical evidence reveals that trust is more difficult to build in Asian nations with high degree of collectivism. Anecdotal evidence seems to support this finding. For example, Morrison and Conaway (2006) suggest that Indonesians, Malaysians, Filipinos,

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Singaporeans, and Thais only do business with people they know and like. Similarly, Vietnamese need to first develop personal trust before doing business with anyone. This anecdotal evidence implies that trust building is a critical success factor for doing business in Southeast Asia. From their experiments, Glaeser, Laibson, Sheinkman, and Soutter (2000) show that the degree of social connection among people increases trust and trustworthiness. Moreover, because trust is a dynamic concept, Rempel, Holmes, and Zanna (1985) argue that prior experience fosters trust. In the context of knowledge transfer, Li (2005) finds that trust is more important in inter- than intra-organizational relationships. In a study of biopharmaceutical, new materials, and automotive sectors of American, European, and Japanese firms, Gulati (1995) notes that future alliances are less likely to be equity-based when the partners have had repeated ties in the past. On the other hand, Williamson (1985) maintains that the costs of a governance structure are easier to recover for large transactions that occur frequently. Thus, transaction frequency favors a high control mode. We propose that H3. The foreign partner’s equity ownership is positively related to the frequency of prior collaboration with the local partner. Since trust building is a general success factor for doing business in Southeast Asia, we expect to see no difference in the relationship between the foreign partner’s equity ownership and the frequency of prior collaboration with the local partner in Vietnam versus in the other Southeast Asian countries. However, because Vietnam’s legal infrastructure is relatively underdeveloped by market economy standards, the foreign partner is likely to protect its interests by relying on trust that it has developed over time with the local partner. Indeed, McMillan and Woodruff (1999) find that trust, which underlies relational contracting in informal credit in Vietnam, can substitute for the legal system. As such, H3a. The relationship between the foreign partner’s equity ownership and the frequency of prior collaboration with the local partner is stronger in Vietnam than in the other Southeast Asian countries. 3. Methodology This study focuses on joint venture agreements between 2 partners, where 1 partner is a foreign entity (a multinational corporation or a foreign government), and the other is a local partner. To identify joint venture agreements, we used the Thomson Financial database. The information in this database is gathered from publicly available sources, including trade publications, news and wire sources, and SEC filings. We also consulted the Dow Jones News Service to verify the validity and reliability of the Thomson Financial database. Other studies have found the information contained in the Thomson Financial database to be reliable (Anand & Khanna, 2000). To be included in the sample, each joint venture agreement must have information with respect to the variables of interest (to be described below). Our final sample contains 375 global joint venture agreements, located in Southeast Asia, that were announced between 1990 and 1999 (see Table 1). Of the 6 Southeast Asian countries, Vietnam has the largest number of joint ventures (84) and the Philippines the smallest (33). Singapore, Indonesia, Malaysia, and Thailand

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Table 1 Distribution of Southeast Asian joint venture sample by foreign partner’s country of origin (N ¼ 375) Foreign partner’s Joint venture location Country of origin Indonesia

Malaysia

Total Philippines

Singapore

Thailand

Vietnam

Argentina Australia Austria Belgium Canada China Denmark Finland France Germany Hong Kong Hungary India Indonesia Italy Japan Malaysia Netherlands New Zealand Norway Singapore Slovak Republic South Korea Spain Switzerland Taiwan Thailand United Kingdom United States Vietnam

0 0.0% 0 0.0% 4 6.1% 9 12.7% 1 1.5% 2 2.8% 0 0.0% 0 0.0% 0 0.0% 1 1.4% 0 0.0% 2 2.8% 0 0.0% 0 0.0% 0 0.0% 1 1.4% 0 0.0% 3 4.2% 3 4.5% 3 4.2% 0 0.0% 1 1.4% 0 0.0% 0 0.0% 1 1.5% 1 1.4% 0 0.0% 3 4.2% 1 1.5% 3 4.2% 20 30.3% 15 21.1% 14 21.2% 0 0.0% 0 0.0% 3 4.2% 0 0.0% 1 1.4% 0 0.0% 0 0.0% 2 3.0% 3 4.2% 0 0.0% 0 0.0% 6 9.1% 3 4.2% 0 0.0% 0 0.0% 0 0.0% 1 1.4% 3 4.5% 2 2.8% 2 3.0% 0 0.0% 5 7.6% 1 1.4% 4 6.1% 12 16.9% 0 0.0% 1 1.4%

1 0 0 0 1 0 0 0 1 1 0 0 1 1 0 8 3 0 0 0 3 0 3 0 0 3 1 1 5 0

3.0% 0.0% 0.0% 0.0% 3.0% 0.0% 0.0% 0.0% 3.0% 3.0% 0.0% 0.0% 3.0% 3.0% 0.0% 24.2% 9.1% 0.0% 0.0% 0.0% 9.1% 0.0% 9.1% 0.0% 0.0% 9.1% 3.0% 3.0% 15.2% 0.0%

0 3 0 0 1 4 0 1 0 2 0 1 0 1 1 7 3 2 1 0 0 0 0 0 1 1 0 2 15 0

0.0% 6.5% 0.0% 0.0% 2.2% 8.7% 0.0% 2.2% 0.0% 4.3% 0.0% 2.2% 0.0% 2.2% 2.2% 15.2% 6.5% 4.3% 2.2% 0.0% 0.0% 0.0% 0.0% 0.0% 2.2% 2.2% 0.0% 4.3% 32.6% 0.0%

1 1.3% 0 0.0% 3 4.0% 3 3.6% 2 2.7% 0 0.0% 0 0.0% 2 2.4% 0 0.0% 0 0.0% 2 2.7% 1 1.2% 0 0.0% 1 1.2% 0 0.0% 0 0.0% 4 5.3% 4 4.8% 4 5.3% 3 3.6% 1 1.3% 1 1.2% 0 0.0% 0 0.0% 1 1.3% 0 0.0% 0 0.0% 1 1.2% 4 5.3% 0 0.0% 26 34.7% 17 20.2% 2 2.7% 3 3.6% 0 0.0% 2 2.4% 0 0.0% 0 0.0% 1 1.3% 0 0.0% 4 5.3% 9 10.7% 0 0.0% 1 1.2% 2 2.7% 12 14.3% 0 0.0% 1 1.2% 0 0.0% 1 1.2% 1 1.3% 3 3.6% 0 0.0% 3 3.6% 5 6.7% 3 3.6% 12 16.0% 13 15.5% 0 0.0% 0 0.0%

2 22 5 2 3 9 1 2 12 16 3 1 4 6 9 93 25 7 2 1 21 1 26 1 3 13 6 17 61 1

0.5% 5.9% 1.3% 0.5% 0.8% 2.4% 0.3% 0.5% 3.2% 4.3% 0.8% 0.3% 1.1% 1.6% 2.4% 24.8% 6.7% 1.9% 0.5% 0.3% 5.6% 0.3% 6.9% 0.3% 0.8% 3.5% 1.6% 4.5% 16.3% 0.3%

Total

66 17.6% 71 18.9% 33

8.8%

46

12.3%

75 20.0% 84 22.4% 375 100.0%

have 46, 66, 71, and 75 joint ventures, respectively. In terms of the foreign partner’s country of origin, the top 10 investors are Japan, the United States, Malaysia, South Korea, Australia, Singapore, United Kingdom, Germany, Taiwan, and France, capturing 81% of the total Southeast Asian joint ventures. 3.1. Flow of joint venture activity Table 2 describes the flow of joint venture activity in the manufacturing sectors (2-digit SIC codes 20–39) in Southeast Asia organized by regional country of origins of the foreign partners during the 1990–1999 period. Out of 375 joint ventures in our sample, 309 are in the manufacturing sectors. Overall, the pattern of differences in the flow of joint venture activity is statistically significant as indicated by the w2 statistic. Three points are worth noting. First, Japan still

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Table 2 Distribution of Southeast Asian joint ventures by 2-digit manufacturing SIC codes and regional country of origin Two-digit SIC code 20 21 22 23 24 25 26 28 29 30 31 32 33 34 35 36 37 38 39 Total

Regional country of origins of foreign partners China

Japan

S Korea

S & SE Asia

AUSNZ

AMER

Europe

Total

2 0 1 1 0 0 2 2 0 3 0 4 2 1 0 2 1 0 0

5% 0% 14% 50% 0% 0% 15% 4% 0% 14% 0% 17% 10% 10% 0% 4% 4% 0% 0%

3 0 3 1 1 0 4 17 1 7 0 6 2 2 6 17 7 1 1

8% 0% 43% 50% 20% 0% 31% 35% 6% 33% 0% 25% 10% 20% 33% 37% 25% 25% 100%

0 0 0 0 1 0 1 0 0 1 0 4 6 0 3 5 5 0 0

0% 0% 0% 0% 20% 0% 8% 0% 0% 5% 0% 17% 29% 0% 17% 11% 18% 0% 0%

11 1 0 0 2 1 4 6 3 3 0 8 2 0 1 3 4 1 0

30% 100% 0% 0% 40% 100% 31% 13% 17% 14% 0% 33% 10% 0% 6% 7% 14% 25% 0%

6 0 0 0 0 0 1 1 1 1 0 0 4 3 0 2 1 0 0

16% 0% 0% 0% 0% 0% 8% 2% 6% 5% 0% 0% 19% 30% 0% 4% 4% 0% 0%

6 0 1 0 1 0 1 9 3 2 1 1 1 3 5 10 5 0 0

16% 0% 14% 0% 20% 0% 8% 19% 17% 10% 25% 4% 5% 30% 28% 22% 18% 0% 0%

9 0 2 0 0 0 0 13 10 4 3 1 4 1 3 7 5 2 0

24% 0% 29% 0% 0% 0% 0% 27% 56% 19% 75% 4% 19% 10% 17% 15% 18% 50% 0%

37 1 7 2 5 1 13 48 18 21 4 24 21 10 18 46 28 4 1

21

7%

79

26%

26

8%

50

16%

20

6%

49

16%

64

21%

309

China, Hong Kong, and Taiwan are grouped into China. India (S Asia) is combined with Southeast Asian (SE Asia) countries. Australia and New Zealand are grouped into AUSNZ. The US, Canada, and Argentina are grouped into AMER. All Western and Eastern European countries are combined into 1 group. Percentages are based on row total. w2 ¼ 161.83, p-value ¼ 0.001.

commands a larger proportion of the flow of joint venture activity in the manufacturing sectors, followed by Europe and South and Southeast Asian countries. On the other hand, Australia and New Zealand as a group as well as China, Hong Kong and Taiwan as another group engage in the smallest proportion of the flow of joint venture activity in the manufacturing sectors. When the China group, Japan, South Korea, and South and Southeast Asia group are put together into the ‘‘Asia’’ group, while Australia and New Zealand, the Americas, and Europe are combined into the ‘‘West’’ group, the results reveal that 57% of the flow of joint venture activity in the manufacturing sectors is predominantly represented by Asian countries. We obtain similar figures (not reported in the table) when we divide the overall sample into 2 sub-periods of equal length, the 1990–1994 and the 1995–1999 periods. This result suggests that multinational corporations from the Asian countries are more active than their Western counterparts in driving the flow of FDI activity in Southeast Asia. Second, looking at the row total (last column) where the number of joint ventures is at least 10, it is clear that Japan dominates the flow of joint venture activity in SIC codes 28, 30, 35, 36, and 37. South Korea leads other countries in SIC code 33. For SIC codes 20, 26, and 32, South and Southeast Asian countries are the dominant players. Australia and New Zealand as a group as well as the Americas together

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control 60% of the flow of joint venture activity in SIC 34, while Europe is dominant in SIC 29. Third, classifying the manufacturing sectors into high technology (SIC codes: 28, 29, 35, 36, 37, and 38) and non-high technology industries (see Chen & Hu, 2002) reveals that Japan, Europe, and the Americas lead the other groups with a combined total of 75% of the flow of joint venture activity in the high-technology manufacturing sectors. South and Southeast Asian countries dominate the non-high-technology manufacturing sectors, followed by Japan and Europe, for a combined total of 58% of the flow of joint venture activity. Table 3 shows the flow of joint venture activity in the manufacturing sectors (2-digit SIC codes 20–39) in Southeast Asia organized by joint venture locations during the 1990–1999 period. Similar to Table 2, 3 points are worth noting. First, Vietnam leads the group with a greater flow of joint venture activities in the manufacturing sector, followed by Indonesia, Thailand, and Malaysia. Overall, the pattern of differences in the flow of joint venture activity into these Southeast Asian countries is statistically significant with a p-value of 0.035. Second, looking at the row total (last column) where the number of joint ventures is at least 10, it is apparent that Vietnam is the dominant recipient of the flow of joint venture activity in SIC codes 20, 28 (tie with Indonesia), 32 (tie with the Philippines), 33, 36, and 37 (tie with Thailand). For SIC codes 26, 29, and 30, Thailand leads the other countries. Singapore comes second place after Vietnam in SIC code 36, and Malaysia dominates in

Table 3 Distribution of Southeast Asian joint ventures by 2-digit manufacturing SIC codes and joint venture location Two-digit

Joint venture location

SIC code

Indonesia

Malaysia

Philippines

Singapore

Thailand

Vietnam

20 21 22 23 24 25 26 28 29 30 31 32 33 34 35 36 37 38 39 Total

7 0 3 0 4 0 3 13 3 4 0 4 4 2 5 5 4 0 0 61

6 0 0 0 1 0 3 6 3 3 1 4 4 4 5 6 4 1 1 52

2 0 0 0 0 0 0 3 2 4 0 6 3 2 2 1 5 0 0 30

1 0 0 0 0 0 0 3 1 3 1 1 2 0 1 12 1 1 0 27

3 0 3 1 0 0 5 10 7 6 1 3 3 0 2 9 7 0 0 60

18 1 1 1 0 1 2 13 2 1 1 6 5 2 3 13 7 2 0 79

19% 0% 43% 0% 80% 0% 23% 27% 17% 19% 0% 17% 19% 20% 28% 11% 14% 0% 0% 20%

16% 0% 0% 0% 20% 0% 23% 13% 17% 14% 25% 17% 19% 40% 28% 13% 14% 25% 100% 17%

Total

5% 0% 0% 0% 0% 0% 0% 6% 11% 19% 0% 25% 14% 20% 11% 2% 18% 0% 0% 10%

w2 ¼ 115.85, p-value ¼ 0.035. Percentages are based on row total.

3% 0% 0% 0% 0% 0% 0% 6% 6% 14% 25% 4% 10% 0% 6% 26% 4% 25% 0% 9%

8% 0% 43% 50% 0% 0% 38% 21% 39% 29% 25% 13% 14% 0% 11% 20% 25% 0% 0% 19%

49% 100% 14% 50% 0% 100% 15% 27% 11% 5% 25% 25% 24% 20% 17% 28% 25% 50% 0% 26%

37 1 7 2 5 1 13 48 18 21 4 24 21 10 18 46 28 4 1 309

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Table 4 Distribution of Southeast Asian joint ventures by joint venture location and regional country of origin Panel A: Before July 1997a Joint venture

Regional country of origins of foreign partners

Location

China

Indonesia Malaysia Philippines Singapore Thailand Vietnam Total

Japan

S Korea

S & SE Asia

Total AUSNZ

AMER

Europe

3 4 3 5 2 3

5% 6% 11% 13% 3% 4%

18 14 8 7 24 17

30% 22% 30% 18% 35% 23%

6 3 3 0 2 12

10% 5% 11% 0% 3% 16%

18 8 6 4 7 12

30% 13% 22% 10% 10% 16%

4 8 0 3 3 3

7% 13% 0% 8% 4% 4%

3 11 4 11 11 11

5% 17% 15% 28% 16% 15%

8 16 3 9 19 15

13% 25% 11% 23% 28% 21%

60 64 27 39 68 73

20

6%

88

27%

26

8%

55

17%

21

6%

51

15%

70

21%

331

Panel B: After July 1997b Joint venture

Regional country of origins of foreign partners

Total

Location

China

Japan

S & SE Asia

AUSNZ

Indonesia Malaysia Philippines Singapore Thailand Vietnam

0 1 0 0 2 2

0% 14% 0% 0% 29% 18%

2 1 0 0 2 0

33% 14% 0% 0% 29% 0%

1 0 3 0 0 4

17% 0% 50% 0% 0% 36%

0 2 0 1 0 0

0% 29% 0% 14% 0% 0%

1 2 3 5 2 2

17% 29% 50% 71% 29% 18%

2 1 0 1 1 3

33% 14% 0% 14% 14% 27%

6 7 6 7 7 11

Total

5

11%

5

11%

8

18%

3

7%

15

34%

8

18%

44

AMER

Europe

China, Hong Kong, and Taiwan are combined into the ‘‘China’’ group. India (S Asia) is combined with Southeast Asian (SE Asia) countries. Australia and New Zealand are grouped into AUSNZ. The US, Canada, and Argentina are grouped into AMER. All Western and Eastern European countries are combined into 1 group. Percentages are based on row total. a 2 w ¼ 53.93, p-value ¼ 0.005. b 2 w ¼ 35.59, p-value ¼ 0.078.

SIC 34. While tied with Vietnam in SIC 28, Indonesia is the largest recipient of the flow of joint venture in SIC 35. Third, when classified into high technology2 and non-hightechnology industries, Vietnam, Thailand, and Indonesia combined represent 66% of the flow of high-technology sectors. For the non-high-technology sectors, Vietnam, Indonesia, and Malaysia together make up 66% of the flow of joint venture activity.

3.2. The effect of the 1997 Asian crisis on flow of joint venture activity To understand how the 1997 Asian Crisis affects the flow of joint venture activity into Southeast Asia, Table 4 shows the distribution of 375 joint ventures in our sample by joint 2 High-technology industries include SIC 28 (chemical and allied products), SIC 29 (petroleum products), SIC 35 (industrial machinery), SIC 36 (electrical and electronic), SIC 37 (transportation equipment), and SIC 38 (measuring equipment).

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venture location and regional country of origins of the foreign partners, before and after July 1997. Panel A reveals that Japan is the dominant joint venture player before July 1997, followed by Europe, and South and Southeast Asia as a group. Together, they represent 65% of the flow of joint venture activity into Southeast Asia before July 1997. As the w2 statistic shows, the differences in the proportion of joint venture activity that flows into Southeast Asia before July 1997 are statistically significant. Moreover, Japan and South and other Southeast Asian countries are the dominant investor in Indonesia, making up a combined 60% of the flow. In Malaysia, Europe is the largest investor, followed by Japan. Similar to the case of Indonesia, Japan and South and other Southeast Asian countries are the biggest and second biggest contributors of the flow of joint venture activity in the Philippines. The Americas and Europe lead other groups in contributing to the flow of joint venture in Singapore. In both Thailand and Vietnam, the biggest and second contributors of the flow of joint venture activity are Japan and Europe. Panel B indicates that overall the Americas are the biggest contributors of the flow of joint venture activity in Southeast Asia after July 1997, followed by Europe and South and Southeast Asian countries, representing a combined total of 70% of the flow. The differences in the proportions of joint venture activity that flow into Southeast Asia after July 1997 are significant with a p-value of 0.078. Together, Japan and Europe make up 66% of the flow into Indonesia, while Australia and New Zealand and the Americas represent 58% of the flow into Malaysia. In the Philippines, the Americas and South and other Southeast Asian countries make up 100% of the flow of joint venture activity. The Americas is the dominant investor in Singapore, while in Thailand, the Americas, the China group, and Japan share equal proportions of the flow. The largest contributors of investment into Vietnam are South and other Southeast Asian countries and Europe. Interestingly, there is a role reversal between the Asia and the West groups of nations before and after July 1997. Before July 1997, the Asia and the West groups provided 57% and 43%, respectively, of the flow of joint venture activity into Southeast Asia. The figures became 41% and 59% for the Asia and the West groups, respectively, for the period after July 1997. This role reversal reflects the overall pattern of economic growth in the Asian region. Prior to July 1997, Asian countries experienced significant growth and were able to capitalize on this opportunity to invest in other Asian countries. When the Asian crisis hit in July 1997, many Asian countries were severely affected, while the Western nations, in particular the North American countries, were experiencing the technology boom. As a result, overall investment from Asian countries into Southeast Asia dropped relative to the investments from the Western countries. 3.3. Dependent variable Foreign partner’s equity ownership: Data on percentage ownership of the joint venture came from Thomson Financial. For each partner, we identified its percentage of ownership in the venture. The focus of our analysis is the foreign partner’s equity percentage in the venture. This ownership percentage reflects the foreign partners’ relative control rights of the venture. Table 5 shows that on average, the foreign partner holds a majority ownership in Vietnam (57.4%) and Indonesia (56.3%), but a minority ownership in the Philippines (48.5%), Singapore (47.9%), and Malaysia (45.8%). In Thailand, the joint venture equity

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Table 5 Characteristics of Southeast Asian joint ventures (N ¼ 375) JV characteristics

Indonesia

Malaysia

Philippines

Singapore

Thailand

Vietnam

Number of purely manufacturing JVs Number of purely marketing JVs Number of purely R&D JVs Number of manufacturing and marketing JVs Number of marketing and R&D JVs Number of manufacturing and R&D JVs Number of manufacturing, marketing, and R&D JVs Average joint venture investment ($ million) Number of JVs involving technology Complete operational alignmenta Direct competitorsb Partial operational alignmentc Complete operational dissimilarityd One or more parent is government Foreign parent is in Fortune Global 500 Average annual country risk score One-year lagged average annual country risk score Average cultural distance between JV parents No. of JVs in which parents have prior JV experience Average foreign partner’s equity ownership (%)

49

36

24

19

51

61

1

8

3

14

12

4

2 13

5 18

0 6

4 6

2 9

1 18

1

2

0

0

0

0

0

1

0

0

0

0

0

1

0

3

1

0

190.10

120.62

168.05

38.41

144.96

33.38

25

18

7

18

23

32

4

0

1

1

5

12

4 15

8 19

4 13

1 15

3 21

3 22

43

44

15

29

46

47

9

15

5

13

11

38

12

11

7

8

13

19

67.49

77.54

52.51

94.19

74.65

39.59

66.15

77.14

49.13

93.51

74.64

34.07

2.00

3.32

1.83

3.18

2.31

2.19

3

0

2

2

4

10

56.25

45.84

48.49

47.87

50.07

57.36

a This group contains joint ventures in which the primary SIC codes of both parents are the same as that of the joint venture. b This group contains joint ventures in which the two parents share the same primary SIC code. c This group contains joint ventures in which the primary SIC code of one of the parents is the same as that of the joint venture. d This group contains joint ventures in which the primary SIC codes of both parents and the joint venture are all different.

ownership is about evenly split between the foreign and local firms. A Kruskal-Wallis test indicates a statistically significant difference (a w2 statistic of 53.3) in the foreign partner’s equity ownership in these Southeast Asian countries.

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3.4. Independent variables Cultural dissimilarity: between the 2 joint venture partners is a proxy for partner/ behavioral uncertainty. Based on (Hofstede 1980, 2001) 4 dimensions: power distance, uncertainty avoidance, masculinity/femininity, and individualism/collectivism, cultural dissimilarity between the 2 joint venture partners was computed for each P joint venture agreement by using the Kogut and Singh (1988) method, as follows: CD ¼ 4i¼1 fðScoreij  Scoreik Þ2 =V i Þg=4; where i is the Hofstede’s ith dimension, j is foreign partner’s home country, k is joint venture location, and Vi is the variance of the ith dimension. The usefulness of the Kogut and Singh’s cultural distance index has been validated in numerous studies on joint ventures (e.g., Barkema & Vermeulen, 1997; Hennart & Larimo, 1998; Morosini, Shane, & Singh, 1998; Park & Ungson, 1997). Glaeser, Laibson, Sheinkman, and Soutter (2000) find from their experiments that the tendency to cheat one another increases when partners have national and racial differences. As such, cultural dissimilarity is a measure of the partners’ tendency to behave opportunistically when they come from 2 different cultural backgrounds. On average, relative to the other countries, joint ventures in the Philippines have partners whose cultures are not very different from each other (a cultural distance score of 1.83). Joint ventures in Malaysia, however, have partners with greater cultural dissimilarity (a score of 3.32) relative to joint ventures in other countries. A Kruskal-Wallis test suggests a statistically significant difference (a w2 statistic of 87.6) in the cultural dissimilarity of joint venture partners in Southeast Asia. Type of joint venture activity: The type of joint venture activity may also determine the foreign partner’s equity ownership in the venture. Specifically, a purely marketing joint venture is likely to involve human asset specificity, while a purely manufacturing or R&D joint venture tends to entail physical asset and/or human asset specificity (see David & Han, 2004, for a classification of asset specificity measures). Similarly, a joint venture involving a combination of activities (such as manufacturing and marketing, marketing and R&D, manufacturing and R&D, or a combination of the 3 pure activities) is likely to entail a greater degree of asset specificity than the 3 pure activities). The Thomson Financial database provides information about the types of joint venture activities. Following Kogut (1991), we created 7 dummy variables to indicate 3 groups of joint ventures involving pure activities (manufacturing, marketing, and R&D) and 4 groups of joint ventures involving a combination of the 3 pure activities). We used these dummy variables as a proxy for asset specificity. Table 5 reveals a total of 240, 42, and 14 joint ventures involving purely manufacturing, purely marketing, and purely R&D activities, respectively. In the remaining 79 joint ventures, the 2 partners engage in a combination of activities (70 in manufacturing and marketing, 3 in marketing and R&D, 1 in manufacturing and R&D, and 5 in manufacturing, marketing and R&D). In any of these Southeast Asian countries, purely manufacturing represents the most common joint venture activity. Vietnam again has the largest number (61) of manufacturing joint ventures, while Singapore has the smallest (19). On the other hand, more marketing joint ventures are located in Singapore (14) and Thailand (12) than in the other 4 countries. Purely R&D joint ventures are relatively rare compared to the other pure activities. Prior joint venture experience: is a measure of transaction frequency. The higher is the frequency of prior collaboration between the 2 partners, the more likely is each partner

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able to trust each other. Moreover, a longer history of prior relationships lowers the costs of developing future transactional relationships and of monitoring the transactions. For each joint venture agreement in a given year, we examined Thomson Financial’s database dating back to 1979 to identify whether the 2 partners had any previous joint venture experience with each other. We summed the number of prior joint venture experiences for a given pair of partners. Out of the 375 joint venture agreements in our sample, 21 are between partners with prior joint venture experience. The maximum number of prior collaborations between 2 partners in our sample is 7. Table 5 indicates that Vietnam has the most instances of prior collaboration (10) between the joint venture partners. On the other hand, none of the joint ventures in Malaysia has partners with prior collaboration. There are 2 joint ventures in both the Philippines and Singapore where the partners have had prior collaboration. In Indonesia and Thailand there were 3 and 4 joint ventures, respectively, in which partners had prior collaboration with each other. 3.5. Control variables Country risk: Economic uncertainty affects the foreign partner’s ownership in the joint venture (Pan, 1996). He finds that the foreign partner was more likely to own a 50% stake than a minority stake in the venture as China’s country risk situation improved. To measure economic uncertainty, we used the Euromoney annual country risk ratings as a proxy for location risk in the country where the joint venture operates. The Euromoney annual country risk ratings have been used in other studies (Barkema & Vermeulen, 1998; Mudambi, 1998; O’Donnell, 2000), and have been shown to be a reliable predictor of the country economic performance. To obtain its overall annual country risk score, Euromoney assigns a weighting to 9 risk categories. These categories are political risk, economic performance, debt indicators, debt in default or rescheduled, credit ratings, access to bank finance, access to short-term finance, and discount on forfeiting. The country risk scores range from 0 to 100, with higher scores indicating lower risk.3 Because the Euromoney annual country risk rating measures creditworthiness, an investment in a high-risk country (a low country risk score) is likely to subject the foreign partner to a greater likelihood of capital misappropriation. As shown in Table 5, Singapore is the safest country in Southeast Asia (average score of 94.2), while Vietnam is the highest-risk country (average score of 39.6). The Philippines, Indonesia, Thailand, and Malaysia have an average country risk score of 52.5, 67.5, 74.7, and 77.5, respectively. A Kruskal-Wallis test shows a statistically significant difference (a w2 statistic of 315.4) in the annual country risk scores of these countries. Because the annual country risk score is ex ante unknown at the time the joint venture is announced in a given year, we used the 1-year lagged country risk score of the joint venture location in our multivariate analysis.4 3 The Euromoney’s political risk indicator is different from that of the International Country Risk Guide (ICRG). The ICRG captures various assessments of 12 social, economic, political, and legal indicators. In their study, Cosset and Roy (1991) showed that the Euromoney annual country risk rating is an economic indicator of creditworthiness. 4 To check the robustness of our proxy for economic uncertainty, we also used (1) the annual inflation rate for each country obtained from the World Bank, and (2) the annual Corruption Perception Index score obtained from Transparency International. Our qualitative conclusions remain unchanged when these alternative proxies for economic uncertainty are used. Furthermore, Pan (2002) argues that the foreign partner’s equity ownership depends on the economic uncertainty of its home country. The inclusion of the annual country risk score of the

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Industry uncertainty: In addition to country risk, industry uncertainty is likely to affect the foreign partner’s equity ownership in the joint venture. For example, Bradley and Gannon (2000) find that demand uncertainty affects the firm’s propensity to use a certain control mode. David and Han (2004) provide a list of variables that have been used in prior studies to proxy for market conditions, such as demand and price changes, unpredictability of customers, and total transaction volume. In general, market conditions also include other industry characteristics such as industry growth rates, capital intensity, and concentration ratios. Sudarsanam (1992) documents a positive relationship between industry growth rates and the systematic (market) risk as measured by beta in the context of the Capital Asset Pricing Model (Lintner, 1965; Mossin, 1966; Sharpe, 1964). Jose and Stevens (1987) show that both industry concentration and capital intensity are related to systematic risk. We use systematic risk at the industry level as a measure of industry uncertainty. Our systematic risk data comes from the Cost of Capital Quarterly 1994 and 2001 Editions published by the Ibbotson Associates. The Ibbotson Associates provide 2 measures of systematic risk: one that includes the effect of gearing (debt usage), and one that does not. We use systematic risk that excludes the effect of gearing because this measure better reflects business/operating risk in the industry. Our matching procedure is based on the 4-digit SIC code. If there is no match at the 4-digit level, we use the lowerdigit level until we find a match. Based on this matching procedure, we then assigned the median value of industry systematic risk from the Cost of Capital Quarterly 1994 Edition to joint ventures announced between 1990 and 1994. For joint ventures announced between 1995 and 1999, we used the median industry systematic risk from the Cost of Capital Quarterly 2001 Edition.5 The overall sample average industry b is 0.54, with a standard deviation of 0.33. R&D intensity: Anderson and Gatignon (1986) argue that firms would like a greater degree of control as the proprietary nature of its product increases. R&D intensity is typically used as a measure of the proprietary nature of a firm’s product. Because our sample contains public and private, as well as domestic and foreign firms, it was not possible to obtain the R&D data at the firm (joint venture partner) level. Moreover, differences in accounting standards across countries make it very difficult to create a consistent measure of R&D intensity across firms from different countries. As a result, we used the R&D intensity at the industry level, based on the US data. R&D intensity is defined as the ratio of R&D expenditures to sales. For each joint venture announced in a given year, we matched the 4-digit SIC code of the joint venture with that in the Compustat database. We collected R&D intensity data for each firm in the year of the joint venture announcement, and used the median value as the proxy for R&D intensity in a given 4-digit SIC code in the year of the joint venture announcement. The average R&D intensity in our sample is 1.63%, with a standard deviation of 4.17%. As an alternative to R&D intensity, we created a dummy variable that takes a value of 1 if the joint venture agreement occurs in the high-technology industries (2-digit SIC codes 28, 29, 35, 36, 37, (footnote continued) foreign partner’s country of origin in our empirical analysis also did not change our results. Similarly, using the difference in the country risk scores of the joint venture location and the foreign partner’s country of origin leaves our results unchanged. For brevity, these results are not reported. 5 It would have been ideal to assign industry b in a given year to joint ventures announced in that year. However, because b in a given year is computed over the preceding 60 months, bs in 2 adjacent years are quite similar in magnitude.

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38), and 0 otherwise.6 Joint ventures in these sectors are more likely to involve tacit knowledge and transfer of technology or production processes (Chen & Hu, 2002). As a result, this dummy variable captures the potential for bargaining frictions and information asymmetry between the transacting parties. As shown in Table 5, there are 123 joint ventures in high-technology sectors. The Philippines and Vietnam have 7 and 32 of these joint ventures, respectively. The number of joint ventures in hightechnology sectors in Singapore, Malaysia, Thailand, and Indonesia is 18, 18, 23, and 25, respectively. Advertising intensity: Previous studies (e.g., Gatignon & Anderson, 1988; GomesCasseres, 1989) find that higher levels of joint venture ownership is also related to advertising intensity, defined as the ratio of advertising expenditure to sales. Firms in advertising-intensive industries are likely to have accumulated significant experience and expertise in conducting advertising campaigns, and can use that experience or expertise in new markets. Nevertheless, such experience or expertise is also hard to transfer to a joint venture partner, especially if the new markets are located in foreign countries with different values and customs. Measuring advertising intensity at the firm level poses the same difficulties as those associated with the R&D intensity. As a result, we used industry-level advertising intensity data for the US firms from the Compustat database. We matched the 4-digit SIC code of the joint venture with that in Compustat. We then collected advertising intensity data for each firm in the year of the joint venture announcement, and used the median value as the proxy for advertising intensity in a given 4-digit SIC code in the year of the joint venture announcement. The average advertising intensity is 0.11%, with a standard deviation of 0.62%. Total investment in the venture: The amount of investment in the joint venture is related to the foreign partner’s equity ownership in the venture (Pan, 1996; Pan & Li, 2000). When the overall investment commitment is high, the foreign partner may seek a smaller equity ownership in order to reduce its risk exposure in the venture. Data on total investment commitment in the joint venture came from Thomson Financial. On average, the total investment in the Southeast Asian joint ventures is US $112.3 million. Joint ventures in Indonesia, Philippines, Thailand, and Malaysia command larger investments (US $190 million, US$168 million, US$145 million, and US$121 million, respectively) relative to those in Singapore and Vietnam (US$38 million and US$33 million, respectively). A Kruskal-Wallis test indicates a statistically significant difference (a w2 statistic of 30.0) in the joint venture total investment commitment across these countries. Operational alignment: The attractiveness of a joint venture to a foreign partner may also depend on the costs of controlling the venture. Examples of the costs of controlling the venture include monitoring costs of the transaction, the costs of guarding against opportunistic behavior by the other partner, and measuring and verifying the performance of the transacting parties. While these costs are generally hard to measure, it is reasonable to assume that they are likely to be lower when the operations of the parent companies are quite similar to that of the joint venture. 6

This classification is also widely used in the literature (Chen & Hu, 2002; Dunning, 1979; Hu & Chen, 1993; Tallman & Shenkar, 1990). Due to the skill requirement (involving computer programming services) of the firms in SIC code 73, one may classify firms in this SIC code as being in the high-technology industry. Including SIC code 73 does not change our qualitative result. Alternatively, we used Thomson Financial’s high-technology classification to indicate the use of technology in the venture. The use of this alternative proxy of technology involvement in the venture does not change our qualitative conclusions.

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The operations of the 2 joint venture partners are more aligned, when their lines of business are similar. We followed Reuer and Koza (2000) to measure business similarity by looking at the primary SIC codes of the partners and the joint venture SIC code at the 4-digit level. We used 4 dummy variables to indicate these cases of business similarity: (1) when both partners and the joint venture share the same primary SIC codes, (2) when both partners’ primary SIC codes are the same but the joint venture has a different SIC code, (3) when the joint venture SIC code is the same as the primary SIC code of only one of the partners, and the partners do not have the same SIC codes, and (4) when both partners and the joint venture do not share the same SIC codes. Case (1) describes a situation where the business environment of the partners completely overlaps with that of the joint venture (complete alignment). Case (2) is a venture between direct competitors. Case (3) involves a partial business overlap (partial alignment), and in Case (4) all entities operate in different industries (complete operational dissimilarity). There are 23 joint ventures that fit both Cases (1) and (2), while Cases (3) and (4) account for a total of 105 and 224 joint ventures, respectively (Table 5). Vietnam has the largest number of Case (1) joint ventures (12), and Malaysia the smallest (0). On the other hand, Malaysia has the largest number of Case (2) joint ventures (8), while Singapore has the smallest (1). The number of Case (3) joint ventures appears approximately evenly distributed across the 6 countries, with a minimum of 13 (the Philippines) and a maximum of 22 (Vietnam). Similarly, the number of Case (4) joint ventures is approximately evenly distributed across Indonesia, Malaysia, Thailand and Vietnam. The Philippines and Singapore have a significantly fewer number of Case (4) joint ventures relative to the other 4 countries. Government as a partner: It was necessary to control for the possibility that 1 or both of the joint venture parents were governments. In some instances, such as transportation or defense industries, a government may not allow complete private ownership. Schnitzer (2002) also notes that concern over country risk is alleviated if the host country government is a joint venture partner. This dummy variable was coded as 1 if 1 or both parents were governments, and otherwise as 0. In this study there are 91 joint ventures in which 1 or both parents are governments. Four out of these 91 are joint ventures in which the parents are both governments. These 4 joint ventures are located in Malaysia (2) and Thailand (2). As reported in Table 5, government is much more involved in joint ventures in Vietnam (38) than in the other 5 countries. The Philippines has the smallest number of joint ventures (5) in which 1 of the partners is a government. Relative bargaining power: The size of the joint venture parents may affect their equity stakes in the venture. Pan and Li (2000) argue that firm size creates a bargaining disparity between the partners, resulting in the larger joint venture parent holding a greater equity stake. Because the joint venture parents in our sample include both private and public domestic and foreign firms, it was not possible to obtain financial data on each. As a proxy for the parent size, we created a dummy variable whereby a joint venture was coded as 1 if its foreign parent was a member of the Fortune Global 500 list during the year the joint venture was announced, and 0 otherwise. In our sample of 375, there are 70 joint ventures in which the foreign parent is a member of the Fortune Global 500. Vietnam commands the group with the highest number of joint ventures (19) whose foreign partner is a Fortune Global 500 member, while the Philippines only has 7. There are 8, 11, 12, and 13 joint ventures in Singapore, Malaysia, Indonesia, and Thailand, respectively, where the foreign partner is a Fortune Global 500 member.

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4. Results Table 6 shows the correlation matrix between the dependent and independent variables. Because the correlation between complete dissimilarity and partial alignment is high (at 0.76), our regression analysis excludes the complete dissimilarity variable. Variance inflation factors and condition index indicate that multicollinearity is not a serious problem in our analysis. The correlation matrix indicates that the lagged annual country risk score, cultural distance score, prior joint venture frequency, and industry uncertainty are significantly correlated with the foreign partner’s equity ownership in Southeast Asian joint ventures. Table 7 provides a multivariate analysis of the relationship between the foreign partner’s equity ownership percentage and cultural dissimilarity, the types of joint venture activities and their interactions with cultural dissimilarity, as well as the frequency of prior collaboration. We used an ordinary least-squares regression model. All t-statistics were computed using White (1980) heteroskedasticity-consistent standard error estimates.7 We also ran a regression, not reported in Table 7, that included a dummy variable that took a value of 1 if the joint venture was announced after July 1997 (the onset of the Asian Crisis), and zero otherwise. We found that foreign partners in joint ventures formed after July 1997 did not become sufficiently nervous so as to alter their ownership structure, despite the increased uncertainty. To maintain consistency between Tables 7 and 8, joint ventures involving more than 1 activity (namely, manufacturing and marketing, marketing and R&D, manufacturing and R&D, and manufacturing, marketing and R&D) are combined into 1 group. This ‘‘combined’’ group is the base group to which joint ventures involving manufacturing or R&D only and marketing only are compared. Also, because there are relatively few purely R&D joint ventures (and there is only 1 such joint venture in Vietnam), they are grouped with purely manufacturing joint ventures.8 Model 1 in Table 7 indicates that the foreign partner’s ownership percentage is lower when cultural distance is high (significant at the 10% level). This result marginally supports Hypothesis 1. Model 2 shows an asymmetric interaction effect involving purely R&D/manufacturing and purely marketing joint ventures. The interaction between cultural distance and the R&D/manufacturing dummy, while negative, is not statistically significant. Thus, Hypothesis 2a is not supported. However, there is support for Hypothesis 2b. When there is greater cultural dissimilarity between partners engaged in purely marketing joint venture activities as opposed to joint ventures involving multiple activities, the foreign partner tends to have a higher level of equity ownership (significant at the 5% level). The significant interaction effects imply that the effect of cultural distance on the foreign 7 To alleviate concern regarding the use of constrained dependent variables, we used a logistic transformation as well. In this alternative specification, the dependent variable is defined as the natural logarithm of the ratio of the foreign partner’s equity ownership to the local partner’s equity ownership. Results using this alternative dependent variable are similar to those in Table 7, and hence, are not reported. 8 Separating purely R&D joint ventures from purely manufacturing joint ventures in Table 7 does not change results reported in that table. In this case, the coefficients of R&D joint ventures dummy and its interaction with cultural distance are not statistically significant. The coefficient of the interaction between cultural distance and manufacturing joint ventures dummy is negative and statistically significant at 10%, but the coefficient of the manufacturing joint ventures dummy is not statistically significant.

196

Mean S.D.

a

Foreign ownership % 51.58 13.91 Lagged country risk 64.60 20.64 0.23 Cultural distance 2.49 1.31 0.16 Prior JV frequency 0.10 0.59 0.11 Industry uncertainty 0.54 0.33 0.15 JV total nvestmenta 2.57 2.08 0.04 Partial alignmentb 0.28 0.45 0.06 0.06 0.24 0.01 Complete alignmentc Complete dissimilarityd 0.60 0.49 0.03 Direct competitorse 0.06 0.24 0.06 Government is partner 0.24 0.43 0.06 Partner is Global 500 0.18 0.39 0.02 Advert intensity (%) 0.11 0.62 0.03 R&D intensity (%) 1.63 4.17 0.04

2

3

4

5

6

0.28 0.19 0.05 0.08 0.03 0.14 0.09 0.01 0.21 0.05 0.00 0.05

0.09 0.15 0.11 0.03 0.02 0.01 0.06 0.07 0.12 0.08 0.07

0.03 0.09 0.02 0.03 0.01 0.02 0.03 0.05 0.02 0.05 0.03 0.01 0.03 0.01 0.03 0.22 0.04 0.10 0.19 0.02 0.06 0.01 0.00 -0.00 0.04 0.49 0.02

7

8

9

0.16 0.76 0.16 0.06 0.07 0.09 0.05

0.31 0.07 0.31  0.15 0.15 0.02 0.08 0.09 0.11 0.04 0.04

Measured in natural logarithm. This group contains joint ventures in which the primary SIC code of one of the parents is the same as that of the joint venture. c This group contains joint ventures in which the primary SIC codes of both parents are the same as that of the joint venture. d This group contains joint ventures in which the primary SIC codes of both parents and the joint venture are all different. e This group contains joint ventures in which the two parents share the same primary SIC code.  po0.05.  po0.01. b

10

11

12

13

0.04 0.02 0.01 0.02 0.01 0.07 0.05 0.00 0.00 0.03

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1

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Table 6 Descriptive statistics and correlations between dependent and independent variables (N ¼ 375)

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Table 7 Results of ordinary least squares regressions examining the determinants of the foreign partner’s equity ownership in Southeast Asian joint venture agreements Variable Constant Independent variables Cultural distance between partners Manufacturing/R&D only dummy Marketing only dummy Cultural distance  manufacturing/R&D only dummy Cultural distance  marketing only dummy Prior experience frequency

Model 1 (H1)

Model 2 (H2)

51.30

52.62

0.96

0.28 2.00 0.69 1.77 4.06

Model 3 (H3) 51.67

Full model 52.79 0.21 1.98 0.67 1.77

2.07

3.94 1.70

Control variables One-year lagged country risk score Joint venture total investment (in natural logarithm) Advertising intensity R&D intensity Industry uncertainty Direct competitorsa Complete alignmentb Partial alignmentc Partner is a government Foreign partner is a Fortune Global 500 firm F statistics

0.14 0.41

0.14 0.24

0.15 0.38

0.14 0.26

0.52 0.12 6.12 3.11 0.30 1.37 0.57 0.22 3.53

0.82 0.21 6.61 3.37 0.55 0.51 0.88 0.49 3.83

0.72 0.14 6.88 2.76 0.48 1.25 0.04 1.36 5.38

0.86 0.22 6.81 3.26 0.17 0.53 0.46 1.03 4.88

Adjusted R2 (%) Number of observations

6.50 375

9.04 375

6.48 375

9.26 375

a

This group contains joint ventures in which the two parents share the same primary SIC code. This group contains joint ventures in which the primary SIC codes of both parents and the joint venture are the same. c This group contains joint ventures in which the primary SIC code of one of the parents is the same as that of the joint venture.  po0.10, two-tailed. po0.05, two-tailed. po0.01, two-tailed. b

partner’s equity ownership percentage in a joint venture is conditional on the type of joint venture activity. Table 7 reveals a positive relationship between the foreign partner’s equity ownership percentage and prior transaction frequency between the partners. In Model 3, the higher is the frequency of prior joint venture collaboration between the 2 partners, the greater the foreign partner’s equity ownership percentage in the venture (significant at the 1% level). An increase in prior experience frequency by 1 unit is associated with a 2.07% higher equity ownership of the foreign partner. The findings strongly support Hypothesis 3. For completeness, we also present the full model in Table 7. The results of the full model qualitatively mirror those of Models 2 and 3. To gain further insights into the potentially different relationships described by Hypotheses H1–H3 between transitional and non-transitional economies, Table 8 reports

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Table 8 The determinants of foreign partner’s equity ownership in Vietnam and the other Southeast Asian countries Variable

Model 1 (H1) Vietnam

Constant Independent variables Cultural distance between partners Manufacturing/R&D only dummy Marketing only dummy Cultural distance  manufacturing/R&D only dummy Cultural distance  marketing only dummy Prior experience frequency Control variables One-year lagged country risk score Joint venture total investment (in natural logarithm) Advertising intensity R&D intensity Industry uncertainty Direct competitorsa Complete alignmentb Partial alignmentc Partner is a government Foreign partner is a Fortune Global 500 firm F statistics

Model 2 (H2)

NonVietnam

60.33

50.58

0.97

0.86

p-valuey

Vietnam 60.50 3.00

0.932

NonVietnam 52.84 0.98

1.71

2.72

6.91 5.43

1.26 0.76

9.05

4.53

0.10

0.11

0.09

0.14

0.04

0.25

0.56

0.15

2.68 0.04 1.82 2.66 1.60 0.70 0.67 0.49

1.09 0.19 7.01 3.47 0.91 2.11 0.61 0.23

1.47

1.46

Adjusted R2 (%) Number of observations

3.22 84

2.22 291

Variable

Model 3 (H3) Vietnam

Constant Independent variables Cultural distance between partners Manufacturing/R&D only dummy Marketing only dummy Cultural distance  manufacturing/R&D only dummy

60.24

2.74 0.01 2.09 5.81 1.31 0.14 1.12 1.50

0.40 0.33 7.72 4.06 0.76 1.03 1.11 0.49

2.12

1.80

1.25 84

p-valuey

0.039

0.053

0.917

4.15 291

Full model

NonVietnam 50.80

y

p-value

Vietnam 60.74 3.67

NonVietnam

p-valuey

52.77 0.99

1.88

2.73

4.85 5.58

1.26 0.75

0.015

0.043

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Table 8 (continued ) Variable

Model 3 (H3) Vietnam

Cultural distance  marketing only dummy Prior experience frequency Control variables Oneyear lagged country risk score Joint venture total investment (in natural logarithm) Advertising intensity R&D intensity Industry uncertainty Direct competitorsa Complete alignmentb Partial alignmentc Partner is a government Foreign partner is a Fortune Global 500 firm F statistics Adjusted R2 (%) Number of observations

Full model

NonVietnam

p-valuey

Vietnam

5.41 2.45

0.49

0.07

NonVietnam 4.57

2.35

0.97

0.14

0.06

0.14

0.43

0.21

0.20

0.14

2.62 0.04 2.69 4.09 2.01 0.81 0.81 2.92

1.03 0.23 7.82 3.52 0.92 2.04 0.82 0.68

4.77 2.10 84

1.38 1.70 291

0.336

2.61 0.00 2.76 6.50 1.68 0.18 0.35 3.78 8.27 4.71 84

p-valuey

0.984 0.281

0.45 0.32 7.69 4.05 0.82 1.04 1.19 0.42 1.68 3.82 291

a

This group contains joint ventures in which the two parents share the same primary SIC code. This group contains joint ventures in which the primary SIC codes of both parents and the joint venture are the same. c This group contains joint ventures in which the primary SIC code of one of the parents is the same as that of the joint venture.  po0.10, two-tailed. po0.05, two-tailed. po0.01, two-tailed. y Test of equality of coefficients between Vietnam and the other Southeast Asian countries, two-tailed. b

separate regression results for Vietnam and the other Southeast Asian countries. Model 1 indicates no significant relationship between cultural dissimilarity and the foreign partner’s equity ownership in either Vietnam or the other Southeast Asian countries. A comparison between Vietnam and the other Southeast Asian countries reveals no statistically significant difference in the coefficients of cultural distance. Contrary to Hypothesis 1a, the relationship between cultural distance and the foreign partner’s equity ownership is not significantly stronger in a transitional economy. Model 2 in Table 8 examines the interaction effects of cultural dissimilarity and joint venture activities. Note that the coefficients of cultural distance in Model 2 represent the coefficients of cultural distance for joint ventures involving multiple activities (the base group). The difference in coefficients between Vietnam and the other Southeast Asian countries is significant at the 5% level. The coefficient of the interaction between cultural dissimilarity and manufacturing or R&D joint ventures dummy in Vietnam is negative and

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statistically significant at the 1% level. Relative to joint ventures involving multiple activities, a greater cultural dissimilarity between partners is associated with a lower equity ownership by the foreign partner for purely manufacturing or R&D joint ventures in Vietnam. Although the coefficient of this interaction is also negative in the other Southeast Asian countries, it is not significant. The difference between coefficients in Vietnam and the other Southeast Asian countries is significant at the 10% level. Hypothesis 2c is supported. Model 2 also shows that the coefficient of the interaction between cultural dissimilarity and purely marketing joint ventures dummy in the other Southeast Asian countries is positive and statistically significant at the 5% level. Relative to joint ventures involving multiple activities, a greater cultural dissimilarity between partners is associated with a higher equity ownership by the foreign partner for purely marketing joint ventures in the other Southeast Asian countries. Although the coefficient of this interaction is also positive in Vietnam, it is not significant. The difference between coefficients in Vietnam and the other Southeast Asian countries is not significant, thus Hypothesis 2d is not supported. Model 3 in Table 8 compares Vietnam with the other Southeast Asian countries with respect to the relationship between prior experience frequency and the foreign partner’s equity ownership. In Vietnam, the foreign partner’s equity ownership tends to be higher when the 2 partners have had frequent joint venture experience with each other (significant at the 1% level). In the other Southeast Asian countries the relationship is negative but not significant. Despite the difference in the signs of the coefficients, suggesting that the relationship between the foreign partner’s equity ownership and prior joint venture collaboration frequency is more positive in Vietnam, the difference between coefficients in Vietnam and the other Southeast Asian countries is not statistically significant. Hypothesis 3a is not supported. For completeness, we also include the full model in Table 8. The signs and statistical significance of the coefficients for the independent variables for the full model mirror those shown in Models 2 and 3. 5. Discussion The basic principle of transaction costs analysis is that organizations choose a governance structure that minimizes the total transaction costs, which include the costs of negotiating a contract, monitoring performance, and monitoring the other partner’s behavior. Aspects of the theory have been tested in numerous empirical studies (see David & Han, 2004). Our study provides a contribution to the joint venture literature through the diversity of companies and joint venture locations in our sample, which permits a comparative analysis of joint ventures in transitional and non-transitional Southeast Asian economies. Transaction costs theory has 3 important dimensions: behavioral uncertainty, asset specificity, and transaction frequency. While there are numerous empirical studies that examine asset specificity and behavioral uncertainty separately, few studies have specifically tested for the effects of transaction frequency, although this is an important aspect of the transaction costs theory (David & Han, 2004). According to transaction costs theory, uncertainty only affects governance in the presence of asset specificity. In general, our findings indeed suggest that in Southeast Asia, the relationship between the foreign partner’s equity ownership and behavioral uncertainty depends on asset specificity. Specifically, for purely marketing joint ventures, a greater cultural distance between

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partners is associated with a higher equity ownership by the foreign partners. Interestingly, for purely manufacturing or R&D joint ventures, higher behavioral uncertainty, as captured by greater cultural dissimilarity between the partners, is not associated with a lower equity ownership by the foreign partners. In terms of implications for organizational practice, our study offers insights into the important factors that determine the amount of equity ownership by foreign enterprises when establishing an international joint venture in Southeast Asia. Overall, our evidence implies that, if the local partner wants a higher equity ownership in a marketing joint venture, it should look for a culturally similar foreign partner. When there is a high degree of cultural similarity, frictions between partners and information costs tend to be low. Given that the local partner has the proprietary knowledge about the local market, it is natural for the local partner to have a greater equity stake in the venture. It is important to keep in mind, however, that the division of equity ownership in a joint venture is an outcome of a negotiation between the partners. In the case of international joint ventures, the scope of such a negotiation is cross-cultural. Because of the differences in cultural backgrounds, each partner is likely to rely on different assumptions about social interaction, legal requirements, economic interests, and political realities when approaching the negotiation table. Indeed, failing to show respect for another culture can lead to an undesirable outcome (Mishra & Sinha, 1999). As such, each partner must understand not only his own interests and priorities, but also the other party’s. Moreover, each partner must have strategic flexibility and be willing to make compromises. For instance, while the foreign partner is likely to possess the tacit knowledge of production processes in a manufacturing joint venture, it would be unreasonable for the foreign partner to claim that the local partner has nothing to offer in the venture. In fact, the local partner also holds the key to the venture’s success through, for example, access to raw materials, the availability of a sufficiently qualified labor pool, and the ability to deal with the government bureaucracy. Also, the foreign partner needs the local partner’s communication skills to deal with the local employees when implementing the production of its products. Without the help of the local partner, communication costs are likely to be high due to cultural differences. These are the local partner’s comparative advantages that should be clearly communicated to, and should be highly appreciated by, the foreign partner. Recognizing this cultural barrier, it is in the foreign partner’s interest to let the local partner have a higher equity ownership in a manufacturing joint venture, so that the local partner has the economic incentives to work towards the common joint venture goals. Our findings further confirm the importance of understanding national cultural differences in conducting business in Asia (Lasserre, 1999). It is interesting to note that our results identify significant differences in the ownership structure of joint ventures in a transitional economy (Vietnam) versus those in the other Southeast Asian countries. Specifically, when engaging in joint ventures that involve multiple activities (any combination of manufacturing, R&D, and marketing) in Vietnam, the foreign partner has a higher equity ownership when there is a high cultural dissimilarity between partners. On the other hand, relative to joint ventures involving multiple activities, a greater cultural dissimilarity between partners is associated with a lower equity ownership by the foreign partner in purely manufacturing or R&D joint ventures in Vietnam. Despite its remarkable economic growth, the development of a legal and regulatory framework has been significantly lagging in Vietnam (Asian Development Bank, 2000). As a result, while its high economic growth rate would be appealing to a foreign enterprise

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interested in forming a joint venture with a local partner in Vietnam, Vietnam’s underdeveloped legal infrastructure relative to market economy standards would offer inadequate protections for the foreign partner in settling contract disputes. According to the World Bank (2005) report, Vietnam receives the lowest rank for investor protection and next to the lowest rank for contract enforcement among the 6 Southeast Asian countries. Thus, the aforementioned results are consistent with the notion that the foreign partner uses a non-legal approach to combat potential opportunistic behavior by the local partner. Williamson (1985) maintains that the costs of a governance structure are easier to recover for large transactions that occur frequently. The assessment of transaction costs associated with an alliance can depend on the presence of trust that emerged from prior collaboration. When the 2 joint venture partners have no prior collaboration with each other, the level of trust between partners tends to be low, which results in high transaction costs. Consistent with this prediction, we find that transaction frequency is significantly positively related to the foreign partner’s equity ownership in Southeast Asian joint ventures. Our results highlight the value of building a long-term relationship when doing business in Southeast Asia. There is ample anecdotal evidence suggesting that conducting business in Southeast Asia requires a great deal of patience, as business executives in Southeast Asia highly value personal relationships (Morrison & Conaway, 2006). Worthy (1991) also argues that, relative to Western companies, Japanese companies tend to see their relationships with other companies as 2-sided, with each partner providing a significant contribution to the venture. The Japanese companies’ focus on building personal relationships makes them successful in Asia. Building this personal relationship requires, not only a time commitment (e.g., making several visits to the Southeast Asian country of interest), but also a good understanding of the country’s national culture. Because equity ownership in a joint venture confers a certain degree of control to the partner, demanding a high percentage of equity ownership—when the foreign partner has not established a prior relationship with a local partner—may convey impolite or disrespectful behavior, and a poor understanding of the Southeast Asian cultures. Our findings that prior joint venture collaboration between the 2 partners is significantly positively related to the foreign partner’s equity ownership in the venture reinforces the notion that long-term relationships matter in Southeast Asia. Interestingly, the finding regarding the positive relationship between the foreign partner’s equity ownership in a venture and the prior collaborative relationship between the joint venture partners is more evident in Vietnam than in the other Southeast Asian countries. This does not necessarily mean that building long-term personal relationships does not matter in the other Southeast Asian countries. Rather, long-term personal relationships serve as a substitute for the inadequate support for investor protection and legal contract enforceability in Vietnam, consistent with the findings of McMillan and Woodruff (1999). In this sense, building personal trust between partners through prior collaborative relationship is a way to ensure a mutually beneficial business relationship between the foreign and local partners. 6. Conclusion We provide a comparative analysis of joint ventures in transitional and non-transitional Southeast Asian countries. Our analysis of the determinants of the foreign partner’s equity ownership in joint ventures reveals that the relationship between cultural dissimilarity and

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the foreign partner’s equity ownership depends on the types of joint venture activities. The strength of this relationship differs between joint ventures in Vietnam and in the other Southeast Asian countries. Moreover, we show that trust plays an important role in determining the ownership structure in Southeast Asian joint ventures. What can policy makers learn from our findings? We observe that Vietnam leads the other Southeast Asian countries in terms of the establishment of new joint ventures in Southeast Asia announced between 1990 and 1999 (84 joint ventures, or 22.4% of the total). In 38 out of these 84 ventures (45%), the government of Vietnam is the local partner, which is not surprising as most companies in transitional economies are state-owned. Also, many of these international joint ventures are in the high-technology sectors, such as chemicals, electrical and electronics. This would seem to indicate that, despite its weaker legal and regulatory framework, Vietnam is doing a successful job at attracting foreign investors. At the same time, the average joint venture investment in Vietnam ($33.4 million) is much smaller than that in the other Southeast Asian nations. By comparison, the average joint venture investment in Singapore is $38.1 million. Yet, most of the new joint ventures in Vietnam (61, versus 19 in Singapore) involve manufacturing. The average investment in purely manufacturing joint ventures in Vietnam is $42.1 million, while that in Singapore is $70.9 million. Building manufacturing facilities is more expensive in Singapore relative to Vietnam. However, considering the sheer number of manufacturing joint ventures in Vietnam compared to Singapore, that a good number (23%) of the foreign partners in Vietnam are Fortune Global 500 firms, and that 45% of the joint ventures in Vietnam are a partnership with the government, this small investment size is not due to inadequate resources. Instead, it indicates that foreign investors are treading carefully in Vietnam. On the surface, partnering with a government may be a good idea because the government writes the law. On the other hand, such a partnership, especially in a country with underdeveloped legal infrastructure, is risky due to the possibility of expropriation by the government or of the current government being overthrown (Lane and Beamish, 1990). It is therefore likely that, because of its weaker legal and regulatory framework, the foreign investors are minimizing their financial risk by entering Vietnam on a smaller scale than the other Southeast Asian countries. Moreover, our results—that cross-cultural understanding and trust are related to the equity ownership of the foreign partner in joint ventures—suggest that joint venture partners resort to a non-legal approach to curb potential opportunistic behavior, supporting Scarborough (2001) contentions and the findings of McMillan and Woodruff (1999). This informal, relational contracting can substitute for a formal enforcement. In fact, McMillan and Woodruff (1999) show that informal, relational contracting plays a major role in the economic development of Vietnam. Likewise, in China—another transitional economy—it plays an important role in the strength of private-sector enterprises, according to Allen, Qian and Qian (2005). However, Sobel (2006) argues that a good legal system can lead to more efficient contracting. Whether informal, relational contracting can substitute for legal enforcement in other transitional economies is an avenue for future research. Nevertheless, the lesson for a transitioning economy, such as Vietnam, is that if it wishes to step up foreign investment in high-tech industries, then it would do well to strengthen its legal and regulatory systems. If a transitioning economy attracts only minimal financial investments on the part of its foreign investors, there is not as much for these multinationals to lose by pulling out and moving to another country

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with more favorable investment climate when the opportunity arises. When this happens, the government may lose momentum in modernizing its economy.

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