Toward a conceptual framework of international joint venture negotiations

Journal of International Management 5 (1999) 141–165

Toward a conceptual framework of international joint venture negotiations Yadong Luo* Department of Management, College of Business Administration, University of Hawaii, 2404 Maile Way, Honolulu, HI 96822, USA

Abstract Knowledge about determinants, processes, and outcomes of negotiation can help international business managers employ appropriate collaborative strategies that will result in maximum benefits. This article tackles a prominent issue in the dynamic, evolutionary process of international joint venture (IJV) development: contract negotiations during IJV formation. Building on a sociopsychological perspective together with transaction cost theory, this article presents an integrated conceptual framework on IJV negotiations in a general context where relevant antecedent, concurrent, and consequent factors are interlocked and mutually influential in sequence. It articulates three levels of antecedents of IJV negotiations (environmental, organizational, and individual), three core concurrent factors (term specificity, issue diversity, and contractual obligability, and three sequential consequences including the immediate outcome (IJV formation satisfaction), intermediate effect (IJV process performance), and ultimate effect (IJV overall performance). The interrelationships among them are proposed. © 1999 Elsevier Science Inc. All rights reserved. Keywords: Joint ventures; Negotiation; Framework

1. Introduction Negotiation is a decision-making or problem-solving process, accomplished jointly by two or more parties. International interfirm negotiation involves a complex process of deliberate interactions between two or more firms originating in different nations and seeking to define their interdependence. Cultural differences, legal pluralism, monetary factors, ideological diversity, and greater uncertainty distinguish international business negotiations from domestic ones (Moran and Stripp, 1991; Adler et al., 1992; Brett and Okumura, 1998). Different groups employ variable negotiation behaviors and styles shaped by geography, his* Tel.: 808-956-7397; fax: 808-956-2774. E-mail address: [email protected] (Y. Lao) 1075-4253/99/$ – see front matter © 1999 Elsevier Science Inc. All rights reserved. PII: S1075-4253(99)00010-1

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tory, religion, and politics; discussions are often impeded when parties to a negotiation seem to pursue different paths of logic (Salacuse, 1991; Tung, 1988). The complexities involved in creating and managing an international joint venture (IJV)—a hybrid, multiownership organizational form—are reflected in the negotiations leading to its establishment. Interpartner conflict often arises due to different perceptions, preferences, behavioral styles, and goals, with transaction hazards precipitated by opportunistic behavior in search of private incentives (Parkhe, 1993; Ring and Van de Ven, 1994). Contract negotiations become an important ex ante mechanism to mitigate such opportunism and conflicts and facilitate interpartner coordination and joint planning. IJV negotiations differ from those of other international businesses because firm motivation, project longevity, and resource commitment are different for IJVs. The resulting terms, clauses, and conditions are distinctive, venture specific, and complex. Because it concerns the establishment and development of a new, independent entity involving long-term commitment, negotiating the contract is an ex ante governance vehicle for ensuring long-term, joint payoffs for both parties. By contrast, contract terms for other international businesses, such as import and export, are generally standardized globally by organizations such as the International Chamber of Commerce. Although previous studies have shed light on international business negotiations in a general context, they have been deficient in specifying dynamics of contract negotiations during IJV formation. This is an important gap since the IJV has increasingly become the strategic vehicle for internationalization by MNEs. In an attempt to redress this deficiency, this study aims to provide a conceptual framework illuminating antecedent, concurrent, and consequent factors of contract negotiations for IJV formation in a general setting. Our overall objective is to link and elaborate these factors in an integrated framework so that future studies will have a better foundation to further advance related studies on IJV negotiations. This effort is of importance to both theory and practice. A conceptual framework on IJV negotiations is now lacking. The provision of this framework will help us establish multidimensional relationships amongst various contingencies, process, and outcome variables. It will offer an additional avenue to assess whether the extant theories in IJV literature, such as resource dependence and transaction cost, can be applied to the dynamics of IJV negotiations. Building upon this framework, future research can either link it with other determinants or contingencies of IJV formation and operations or empirically validate this framework in specific contexts. International managers may be able to draw some practical lessons from this article to improve their IJV negotiation processes and outcomes. It is important for these managers to realize what external and internal contingencies are critical and controllable, what concurrent areas are key to the venture success, and what possible implications accrue from contract negotiations. Knowing this entire process helps managers to construct a solid ex ante foundation for ex post control and goal fulfillment. In the remainder of the article, we first introduce the research background concerning IJV negotiations, followed by an elaboration on various antecedents of IJV negotiations at three levels: contextual, organizational, and individual. The next section illustrates three concurrent factors, namely, issue diversity, term specificity, and contractual obligability. Consequences of IJV negotiations, including immediate, intermediate, and ultimate effects, are delineated in the following section. The interrelationships between antecedent

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and concurrent factors or between concurrent and consequent factors are proposed in these sections.

2. Conceptual background The importance of IJV negotiations is well recognized. Transaction cost theorists argue that contract negotiations serve as ex ante mechanism controlling and attenuating ex post opportunism, which in turn reducing transaction costs for both parties (Williamson, 1979; Menard, 1997). This mechanism is even more important when a negotiated contract involves great resource commitment and is long-term “relational,” as in the case of a joint venture (Williamson, 1979). The joint venture operations are often associated with transactional hazards precipitated in partner opportunism and goal incongruity and environmental threats derived from institutional changes and governmental intervention (Parkhe, 1993; Park, 1996). When operating in a highly complex, dynamic environment, an interfirm network becomes more vulnerable to environmental changes and interparty conflict (Hill, 1990; Park, 1996). This vulnerability requires strong bonds between the parties to sustain honest transactions. IJV management must develop mechanisms for facilitating interpartner learning and collaboration because the norms of reciprocity and trust are alone insufficient to control the venture or make best use of its unique benefits (Hamel, 1991; Yan and Gray, 1994). Negotiating IJV formation is difficult and costly. Since an IJV is typically established by two or more partners undertaking joint investment commitment and risk/benefit sharing according to negotiated terms, the goals and expectations of one partner are often incongruent or incompatible with those of the other. Because an IJV entails mutual commitment of strategic assets in an uncertain, complex environment, transaction costs and contextual risks during formation and subsequent operations are high (Ring and Van de Ven, 1994). Normative specifications and stipulations are necessary for all parties to ensure control of their respective strategic resources while benefiting from possible financial or operational synergies generated from the venture. IJV negotiation is also a social and political process affected by such considerations as cultural distance and government pressure or hindrance (Phatak and Habib, 1996). Given the potential for partner conflict, specifying terms during negotiation is imperative to IJV formation and operations. During the formation stage, goal heterogeneity, low trust, and resource homogeneity are endogenous factors driving subsequent interfirm conflict (Yan and Gray, 1994). During the operations stage, opportunistic behavior, different policies, emergence of local contingencies, and changes in strategic goals and plans by either partner can result in conflicts that prevent expected synergies from occurring (Ring and Van de Ven, 1994). Furthermore, the growth of a network through a dynamic cyclical process contains the seeds of disintegration (Park, 1996). Increasing monitoring of interpartner relations may lead to conflict between parties who are struggling to maintain organizational autonomy in the face of growing interdependence. Moreover, the increase in resource transactions between partners over time implies that their domains will shift from being complementary to being similar, which further increases the likelihood of territorial disputes and competition (Osborn and Hagedorn, 1997). From a bargaining perspective, the anticipated need for interpartner cooperation will influence the negotiation strategies used by each of the parties (Yan and Gray, 1994). When the

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parties act in an adversarial manner, holding each other at arm’s length, they generally use a distributive strategy, that is, limited information is exchanged while each party works independently to gain an information-based advantage in the negotiation (Pruitt and Lewis, 1975). Distributive strategies are less likely in IJV negotiations, however, when such ventures involve interpartner learning and future interdependence. In this case, IJV partners are more likely to use integrative or problem-solving strategies that allow the parties to freely exchange information and produce a mutually beneficial outcome. The problem-solving strategy does not preclude, however, the necessity to explicitly define relevant conditions for IJV establishment and operations (Fayerweather and Kapoor, 1976). The sociopsychological perspective envisages that IJV negotiations are a dynamic process in which various antecedent, concurrent, and consequent factors are interlocked and sequentially influential (Rubin and Brown, 1975). Graham’s process model (Graham, 1987) addresses the importance of successive interactions between negotiators and the impact of context on negotiations. Fayerweather and Kapoor’s negotiation framework (Fayerweather and Kapoor, 1976) highlights the role of the “negotiation situation,” arguing that environmental and organizational variables affect negotiation patterns. Kochan and Katz’s bargaining model (Kochan and Katz, 1988) incorporates institutional factors, such as government intervention and interfirm goal congruity, as predictors of negotiation behavior. Tung’s conceptual paradigm (Tung, 1988) explicitly treats contextual political and cultural factors and business characteristics as antecedents affecting negotiation processes and outcomes. Similarly, Thomas’s structural model (Thomas, 1976) views behavioral predispositions and incentive structures as determinants of negotiation procedures. Finally, Weiss’s RBC perspective (Weiss, 1993) considers conditions (e.g., circumstances, capabilities, culture, and environment) as exogenous factors affecting both negotiation behavior and interfirm relationships. The above studies suggest that interfirm negotiations are an interrelated, sequential process, surrounded by various external contingencies and internal dynamics. Given this successive and interactive nature, an integrated framework of international business negotiations must cohesively link related antecedent, concurrent, and consequent factors and properly illuminate interitem relations and influences (Graham, 1987; Weiss, 1996). Although they shed light on the negotiation process in general, these studies did not dedicate to IJV negotiations in particular. Contract negotiations about IJVs are more complex than those on international business in general. In the case of IJV negotiations, antecedent, concurrent, and consequent factors are sequentially interactive. The impact of contract negotiations on IJV formation and operations is far reaching, including not merely an immediate effect but extended to intermediate and ultimate outcomes. Because strategic motivations and required commitment differ between IJV formations and other international businesses, the organizational dynamics, negotiator behavior, and contractual content in IJV negotiations are idiosyncratic from those in other negotiations. These antecedent, concurrent, and consequent factors are detailed below.

3. Antecedents of IJV negotiations Social psychology theorists maintain that situational constraints and bargainer characteristics influence the process of negotiations that in turn affect negotiation consequences (Rubin

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and Brown, 1975; Straus, 1978; Brett and Okumura, 1998). Situational constraints during IJV negotiations include contingencies at both the macro level (environmental context) and micro level (organizational context). Bargainer characteristics also have a direct bearing on the process factors of IJV negotiations. 3.1. Environmental antecedents 3.1.1. Regulatory environment The regulatory environment is an important contextual contingency affecting IJV negotiation processes. It has a direct and immediate influence on what contract negotiations should discuss, specify, and stipulate. This environment affects IJV negotiations in two major ways. Primarily, it provides a legal framework with which the various terms and conditions specified in the contract must accord (Brouthers and Bamossy, 1997). Normally, governmental regulations have an impact on the following areas: market orientation (export ratio policy), material sourcing (localization policy), technology transfer, equipment import (import license policy), accounting, finance, taxation, and employee recruitment and compensation (labor, union, and employment policies). Both foreign and local partners must familiarize themselves with any of the host government’s FDI and industrial policies that may impact their project. It is also necessary to review corporate and joint venture laws enforced in the host country. Such legalities directly impact how the joint venture should be formed and what must be stipulated in its contract. Contractual terms must be aligned with additional legal antecedents. Policies affecting IJV formation may be used by both developing countries and developed countries. These include: (1) entry mode control, that is, MNEs are allowed to enter certain industries only through specific entry modes; (2) equity control, that is, foreign investors are restricted from holding a certain percentage of equity in the joint venture; and (3) location control, that is, MNEs are required to locate projects in certain geographical regions. Projects in different locations are often taxed differently; (4) duration control, that is, each FDI project should specify the term (number of years) of its joint venture contract. Although this term can be renewed, such renewal is not automatic but usually subject to a new round of approval by governmental authorities; (5) partner control, that is, certain big projects must include local firms assigned by the government. These firms may or may not have a previous cooperative history with the foreign investor; (6) timing control, that is, the host government may freeze approval of some FDI projects for certain periods of time. This often occurs when government agencies have overapproved the number of projects needed for economic development. Major FDI policies may also be changed for a variety of economic and political reasons; (7) project orientation control, that is, each project must be identified in its application and confirmed by the government as belonging to one category: export, technologically advanced, infrastructure, import-substitution, or local market. Each of these orientations receives different treatment by the government; and (8) size control, that is, projects of different investment sizes have to be ratified by different levels of the government. The greater the size, the higher the rank of the authority in charge. When a project plans to increase its investment size, it usually has to receive approval by the same authority that previously ratified the project. MNEs often have to negotiate with a variety of governmental actors to accomplish all or some of their objectives (Brouthers and Bamossy, 1997). Thus, the bargaining power of both po-

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litical and corporate actors is a salient consideration (Killing, 1983; Weiss, 1996). A major source of a host government’s power is its ability to control market access and hand out or withdraw investment incentives. An MNE’s bargaining power stems from its ownership advantages. The regulatory environment also influences each partner’s attitude toward litigation. In the United States, for instance, contracts are viewed in legalistic terms; in Japan and China, contracts are viewed more in the context of the social relationship that exists between the partners. Similarly, in the Japanese and Chinese contexts, control (which is of paramount concern to most U.S. enterprises) is viewed in the light of cooperation. These differences in attitude toward law imply that a firm may have to rely upon alternative methods of conflict resolution with partners from different nations. 3.1.2. Other environmental factors Various factors from the cultural, political, and economic environments may also affect negotiation processes. First, culture often influences negotiations in several important ways. It affects how people process and interpret information. It also influences people’s perception of what is reasonable, right, and acceptable, thus affecting their choice of strategies during the negotiation process and resolution of conflict. Furthermore, cultural differences are reflected in dissimilar ways of making decision, negotiation styles, and conflict resolution methods. Tung (1982) found major differences in these respects between the Americans, Japanese, and Chinese. While the ability to bridge cultural differences does not greatly explain the success of business negotiations, its absence is perceived as a major contributor to failure. That is, ignoring cultural differences often has a detrimental effect on negotiation outcomes. Second, possible agreements between parties from different nations must be examined within the context of the political relations between their countries, such as whether normal diplomatic relations are maintained, technology transfers are constrained, or the material imports and product exports are subject to administrative control. Moreover, host country governments may hinder IJV formation and operations. In many cases, particularly in developing countries, IJV contracts cannot take effect unless they are ratified by the governmental authority in charge of FDI inflow. Third, as political and economic considerations are often inextricably intertwined, the distinctions between these two environments may be fuzzy. There are three sets of economic variables: (1) the type of economic system in a country (e.g., market, centrally planned, or mixed economies). This determines the nature and form of economic cooperation that can take place; (2) the level of economic development in the country. Many less developed countries are chronically short of capital (especially foreign exchange), technological know-how, and skilled labor. Given these circumstances, the partner from the advanced nation must assume much of the responsibility for financing and providing technology and technological capability; and (3) the national objectives or priorities of the host country as defined within five- and ten-year plans and industrial policies. These determine the type and nature of projects that are encouraged in the country at any specific time. 3.2. Organizational antecedents The organizational context of IJV negotiations refers to the structural properties and interorganizational bargaining powers conditioning the course of the negotiation itself (Olekalns

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et al., 1996). These are generally firm related and have a concurrent effect. As discussed below, organizational antecedents influencing IJV negotiation processes include (1) bargaining power; (2) partner stake; (3) previous collaboration; (4) discontinuing options; (5) transaction complexity; and (6) goal congruity. 3.2.1. Bargaining power The relative balance of bargaining power between negotiating firms may be influential. Bargaining power refers to the negotiator’s ability to set discussion parameters, win compromises from the other party, and skew the outcome of the negotiation toward its desired ownership alternative. The stakes bargainers have in a negotiation, along with the availability of alternatives, influence bargaining power (Yan and Gray, 1994). A stake is the level of a bargainer’s dependence on the negotiation relationship and its outcome. As stakes increase, bargaining power decreases. Moreover, having alternatives determines the extent to which parties can choose amongst different arrangements for attaining the same goals. Whichever party has more alternatives is more powerful because it can exercise its best alternative in negotiating the agreement (Graham et al., 1992). Consequently, stakes and availability of alternatives are sources of context-based bargaining power. Yan and Gray (1994) listed eight alternative sources of bargaining power for an IJV partner firm including (1) available substitute partners; (2) strategic importance; (3) technological contribution; (4) management expertise; (5) global support; (6) local knowledge; (7) distribution channels; and (8) resource procurement. Because control is positively influenced by bargaining power, each of the above alternatives is able to inflate bargaining power. The power of a negotiating partner does not reside exclusively within the firm itself, but rather in the relationship it has with its external environment. The relative balance of power of the partners determines the extent to which each partner accommodates the demands of the other. In the negotiation for the IJV (Boeing 767 production) between Boeing and the Japan Civil Transport Development Corporation, the Japanese partner had to make many concessions, including adapting to the American negotiation style, as Boeing had greater bargaining power resulting from possessing technological know-how. 3.2.2. Partner stakes Each partner’s stakes may also influence the negotiation process. These stakes depend upon the amount of perceived gains or losses associated with particular results. Concurrent factors such as term specificity and contractual obligations can serve as ex ante mechanisms protecting the party’s stakes (Williamson, 1979). As a result, the partner who commits more to the venture will attach more value to the negotiation process. Transaction cost theorists suggest that investors deal more cautiously with transactions that involve greater investment commitment (Williamson, 1985). Greater investment implies higher start-up, switching, and exit costs, thus involving higher financial and operational risks. To reduce such transaction costs, firms are usually more circumspect when arranging the terms and conditions of their contracts. 3.2.3. Previous collaboration Previous collaboration between partner firms is expected to affect IJV negotiations. As the length of the interactions between partners increases, economic transactions become increas-

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ingly embedded within the social relations of the two partners, which in turn deters opportunism. Previous contact between partners leads to the development of specialized skills and routines adapted to the exchange. These include specific knowledge about the structure and operation of the partner organization and the abilities of its personnel. Such skills and routines constitute an investment in specific assets adapted to interpartner cooperation. These are at risk if cooperation breaks down. Previous collaboration also fosters a climate of openness that is essential for discussing behavioral problems that may be a barrier to learning. Because past cooperation often implies repeated negotiations, negotiating parties may be more accommodating, cooperative, and honest than when engaged in one-shot transactions because of the prospect of future encounters. 3.2.4. Discontinuing options Options for avoiding or discontinuing negotiations will likewise influence each party’s dedication to the negotiations. A party that has such options is less motivated to work toward an agreement. The selection of strategies and the progress and outcome of the negotiations are therefore affected. Where one or both parties perceive the cessation of negotiations as detrimental to their interests, then either or both partners will become more willing to compromise and explore different modes of conflict resolution. Each partner’s options for discontinuing negotiations rely on its dependence on the partner firm. According to the resource dependence theory (Pfeffer and Salancik, 1978), if one party has to depend on the other’s resources, the latter will be able to control negotiation processes and change negotiation outcomes. Threats of avoiding or discontinuing negotiations will accrue if a dependent party does not concede to the dominant party’s requests. In general, a party has a chance to dominate IJV negotiations if it has other alternative partner candidates, stronger technological or organizational skills, and other complementary competencies that the partner firm wants to acquire. 3.2.5. Transaction complexity The nature and complexity of the transaction also affect the length and process of negotiations. Complex transactions naturally require longer negotiations and more specificity in the contract. When an IJV project involves huge start-up costs and capital requirements, and where there are operational uncertainties and governmental interference, the transaction becomes complex. If the issues under negotiation are numerous and difficult, each party has to make constant tradeoffs while reassessing its priorities and the utility functions of each compromise. This affects the strategies that will be adopted in the negotiation. One party may deliberately magnify the significance of a concession to bargain for better terms in other areas. Where the outcome of one resolution is linked with other disputes, one party may make more concessions so as to maximize the outcome during other negotiations. 3.2.6. Goal congruity From a game theory perspective, goal congruence reduces a player’s uncertainty about what another player will do, which may in turn facilitate making the best response to the partner’s strategies (i.e., Nash equilibrium; Gibbons, 1992). When strategic goals between IJV parties diverge, negotiators are more likely to use distributive rather than integrative or cooperative strategies during negotiation (Rao and Schmidt, 1998; O’Connor, 1997). This

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often gives rise to a negotiation dilemma that Kelley (1966) referred to as “the dilemma of honesty and openness.” In this circumstance, one means by which negotiators avoid costly mistakes and possible conflict is through information exchange and contract specifications. During negotiation, codification of terms and conditions about IJV formation, operations, and management may boost information exchange and transparency and improve the accuracy of interpretations. In the presence of goal differences, allowing leeway in the negotiating issues may plant the seed for subsequent opportunism and conflict. High negotiation specification, on the other hand, may help IJV partners solve possible disputes or improve interfirm cooperation and coordination by providing necessary rules and procedures. 3.3. Negotiator antecedents This set of factors consists of individual traits that influence the process of IJV negotiations. They have a direct bearing on the progress and outcome of negotiations because negotiations are, after all, conducted by individuals. Amongst these antecedents, personality, personal relations, number of negotiators, individual culture, and loyalty are expected to affect IJV negotiation processes. 3.3.1. Personality The personality of a negotiator may affect his/her strategy and behavior during negotiations. The personality characteristics affecting negotiations include (1) introversion versus extroversion—extroversion can have a positive influence on negotiation; (2) experience in international business—more experienced individuals may meet with greater success in the negotiation situation; (3) internationalism versus isolationalism—internationalists tend to be more cooperative than isolationalists in negotiation situations; (4) value systems (terminal, instrumental, interpersonal, and intrapersonal) of the negotiators—a negotiator’s values, in conjunction with the aforementioned personality characteristics, can influence his/her approach to the situation, choice of strategy, perception of efficacy, and range of possible options. 3.3.2. Personal relations Interpersonal relationships are also important to negotiation success. Choice of strategies is influenced by the relationships that exist between negotiators representing different parties. Where the negotiators trust and respect their counterparts on the opposite team, the issues under discussion can be more easily defined and narrowed, thus facilitating a meeting of minds at the negotiation table (Tung, 1988). Rubin and Brown (1975) define a high interpersonal orientation as one in which the parties are responsive and interested in variations in one another’s behavior. Low interpersonal orientations are characterized as nonresponsive and uninvolved in aspects of the relationship. In countries with a strong relational culture (e.g., China, Japan, and Korea), this trait becomes even more critical. Companies in these countries tend to have a warmup period of information exchange before contract negotiations begin. This is actually an effort to construct an interpersonal relationship between the negotiators. Making such social investments is enormously worthwhile because it not only facilitates mutually beneficial negotiations but also nourishes a cooperative culture during IJV operations. Normally, individuals participating in IJV negotiations will later become senior IJV managers.

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3.3.3. Number of negotiators The number of negotiators can have either a favorable or unfavorable influence on negotiations, depending upon the coordination and integration of the group. If one team’s members coordinate well and prepare their strategies beforehand, having more people may enhance its bargaining power or put more pressure on the other team. However, if differences in values and opinions abound within the team, having too many people may impair negotiations. To resolve such intragroup differences, tradeoffs and compromises will have to be made, thus affecting the selection of strategies to be pursued and the progress and outcome of negotiations. 3.3.4. Individual culture The cultural background of the negotiators is expected to influence IJV negotiations. Fewer cultural barriers make accurate interpretations of transaction terms and conditions more likely. A narrow cultural distance promotes information exchange, which is conducive to negotiation. Negotiators from similar cultures are less likely to leave a lot of leeway in the contract, which could cause future dispute. By contrast, firms from countries separated by great cultural distance are likely to negotiate relatively ambiguous initial contracts, planning to make necessary adjustments to these terms over time as they become more familiar with each other. This flexibility is sometimes necessary. For instance, Shenkar and Ronen (1987) report that Confucian philosophy continues to provide the foundation for Chinese cultural values. The tenets of harmony, hierarchy, developing one’s moral potential, and kinship affiliation have relevance for interpersonal behavior. These cultural values lead to (1) building in flexibility in contractual arrangements to avoid lawsuits and save face in the future; (2) emotional restraint and politeness as basic styles of communication; (3) an emphasis on social obligations; and (4) an interrelationship of the life domains of work, family, and friendship. 3.3.5. Loyalty and knowledge The loyalty and knowledge of a negotiator may affect the processes of IJV negotiations. Loyalty to the party a negotiator represents is deemed to motivate his or her negotiation behavior. Negotiators who are loyal to their employers will have more zeal and take more initiative. This leads to more dedication to the process and consequences of negotiations. In fact, one of the widespread strategies used during IJV negotiations is for one side to attempt to reduce another negotiator’s loyalty to his or her firm. This may occur by strengthening personal relationships, exchanging favors, providing entertainment, and the like. To enhance the loyalty of one’s own negotiators, headquarters should delegate them enough power, respond quickly to requests for instruction, and reward them after they return. Additionally, knowledge about a transaction and product and familiarity with the partner organization and host market can stimulate a negotiator’s bargaining power and win him or her more respect from counterparts, thus placing him or her in an advantageous position during negotiations. Although the above environmental, organizational, and individual antecedents are likely to influence IJV negotiation outcomes, this influence is generally indirect. It must pass through concurrent or process factors. Thus, it is important to know not only what concurrent factors are but also how these antecedents are associated with these concurrent factors. These issues are elaborated next.

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4. Concurrent factors and relations with antecedents Because this study is concerned with contract negotiations during IJV establishment, the preparatory period (e.g., getting to know one another and information exchange) is beyond our concern here, although it is the beginning of the entire negotiation process. Graham (1987) proposed a four-stage process model for generic interorganizational negotiations: nontask sounding out (e.g., establishing a rapport), task-related exchange of information, persuasion, and concessions and agreement. Although the negotiation process is, in practice, a continuum that is hard to divide into stages (Fisher, 1980), contract negotiations are primarily associated with the last two stages of Graham’s process proposition. With this in mind, this study suggests that concurrent factors of IJV contract negotiations include (1) term specificity; (2) issue diversity; and (3) contractual obligability. Since these concurrent factors are all related to the content of IJV contract negotiations, knowing what a typical IJV contract (i.e., a greenfield, two-party involved, equity IJV) constitutes may help clarify the concurrent factors discussed afterwards. Typically, the major content of an IJV contract includes (1) legal nature (e.g., limited liability company or not); (2) scope and scale of production or operations; (3) investment commitment and equity distribution; (4) forms of contribution (e.g., cash, equipment, technology, patents, or knowhow); (5) responsibilities of each party; (6) technology or knowledge transfer; (7) production and marketing issues; (8) composition of the board of directors; (9) nomination and responsibilities of high level managers; (10) project preparation and construction; (11) labor and human resource management; (12) accounting, finance, and tax issues; (13) duration of the joint venture; (14) disposal of assets after expiration; (15) renewal, amendments, alterations, and discharge of the agreement; (16) liabilities for breach of contract or agreement; (17) force majeure exceptions and applicable law; (18) settlement of disputes; and (20) effectiveness of the contract and miscellaneous concerns. 4.1. Term specificity A key facet of negotiation content is term specificity, namely, the degree to which major terms, clauses, and conditions of transactions are specified during negotiations and incorporated in the subsequent contract. According to transaction cost theory, the specification of major terms during the negotiations and their eventual codification in a contract provide a safeguard against ex post performance problems because they mitigate each party’s ability to act opportunistically over the course of significant, long-term investments, as in IJVs (Williamson, 1979; Hill, 1990). As one of the major ex ante mechanisms by which conflicts may be overcome and performance enhanced, term specificity serves to reduce managerial complexity by coordinating activities for collective goals (Hill, 1990). Collaborative ventures can fail because of transaction hazards precipitated by opportunistic behavior on the part of each partner or because of high bureaucratic costs involved in coordinating interfirm exchanges (Williamson, 1985). Where there is rivalry between parties, trust building is attenuated and opportunism instigated, thus generating further conflict (Buckley and Casson, 1988). These threats increase the need for ex ante specifications governing each party’s rights, duties, and benefits, which are reflected in the binding terms, clauses, and conditions negotiated and agreed upon by all

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parties. Negotiation ambiguity, by contrast, leaves contractual terms blurred or generalized, lacking clear bounds with respect to the benefits and responsibilities of all parties. This ambiguity creates a breeding ground for shirking responsibility and shifting blame, raising the likelihood of conflict between parties. It also hinders each party’s ability to coordinate activities, utilize resources, and implement strategies (Ring and Van de Ven, 1994). Term specificity therefore serves as an institutionalized mechanism for mitigating opportunism and increasing forbearance (Buckley and Casson, 1988). It helps each party ensure the most effective and efficient use of its distinctive resources and knowledge, thus optimizing the benefits of these resources in the IJV. Moreover, term specificity helps protect the firm from premature disclosure of its strategies, technological core, or other proprietary knowledge. Whether from a resource-based view, interpartner learning, or transaction cost perspective, it is clear that the integration, exploitation, and protection of each investor’s tacit knowledge or strategic resources are critical management issues in IJVs. Term specificity constitutes the underlying ex ante mechanism for utilizing and protecting such knowledge resources. According to transaction cost theory, incentives for opportunism are created ex post, once the investments are sunk in anticipation of performance (Williamson, 1985). If a mechanism cannot be devised to mitigate each party’s ability to act on these incentives, a cost-minimizing transaction may become unattractive at the contract execution stage. Term specificity works against opportunism and alleviates contract hazards and imperfections. The importance of this specificity is elevated when investment uncertainty is high, duration is long, and commitment is heavy. Thus, term specificity concerning IJV investment in a dynamic emerging market is of paramount value to the success of the partnership. While negotiation style, behavior, and strategy typically differ across cultures, term specificity is important to transactions in all cultures. It is not accidental that international business codes and practices have emerged over the last hundred or so years, or that there is an International Chamber of Commerce that provides an impartial point of reference across cultural borders. According to Williamson (1985), economic rationality is likely to outweigh sociocultural contingencies when negotiators commit heavy investments to a long-term venture in an uncertain environment. 4.2. Issue diversity Issue diversity is the degree to which relevant issues are included in contractual negotiations. One of the effective ways to shape negotiation processes and outcomes is to control the agenda of the discussions (Salacuse, 1991). The party who manipulates the scope of negotiable issues will be in an advantageous position during later formation, operations, and management of the IJV. Controlling the scope enables the party to avoid discussing issues that may be unfavorable to the firm, while promoting those topics and terms that are relatively advantageous (Weiss, 1993). Thus, issue or topic control facilitates ex post operational and organizational controls after the formation of the IJV. This is imperative for minority equity holders who need to control local production and operations. Issue diversity represents an ex ante mechanism by which a minority equity holder may dominate IJV operations and growth. A party’s bargaining power and stakes have strong impacts on controlling topic diversity. While the firm’s stake leads to the necessity to take control, its bargaining power makes it possible to implement such controls.

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As introduced earlier, complete coverage of major issues in a typical IJV contract negotiation includes the responsibility, rights, and benefits of each of the parents and IJV management concerning IJV operations and management (e.g., equity distribution, profit sharing, investment amount and contributions, and responsibility/rights of each party and of senior IJV managers), as well as solutions for handling disagreements between the parents and IJV management (e.g., liability for breach of contract, settlements of disputes, applicable law, force majeure, and amendments, alterations, and discharge of the agreement). It also contains rules, procedures, and policies for managing the IJV (e.g., technology transfer, marketing issues, composition of the board, nomination of senior managers, project preparation and construction, labor management, accounting and finance issues, disposal of assets and expiration) and missions, goals, and objectives of the IJV. Ex post hazards of opportunism arise during long-term cooperation within an uncertain world. To mitigate opportunism, ex ante safeguards, such as complete coverage of relevant terms, are essential (Williamson, 1979). There is widespread agreement concerning the effectiveness of the discrete transaction paradigm “sharp in by clear agreement, sharp out by clear performance”—in both law and economics literature (Williamson, 1979). A high degree of issue inclusiveness reduces the likelihood that the project will deviate from its desired course. Complete coverage of terms guides IJV formation, while avoiding the creation of loopholes that could hamper the venture. Because of cultural and geographical distances between parties in different countries, forming an IJV often involves greater difficulty and a higher probability of failure, especially if these guidelines are absent (Killing, 1983). Thus, complete inclusiveness of issues may favor successful IJV formation. Covering issues comprehensively may also help alleviate interpartner conflicts that would otherwise jeopardize this cooperation. 4.3. Contractual obligability Contractual obligability can be defined as the extent to which each party involved in IJV negotiations is restrained by the binding force of the contract. Without such obligability, the contract is incomplete no matter how specific and inclusive the terms are included in contractual negotiations. Concluding an IJV agreement differs from signing an import/export contract in two primary ways. First, the stipulations of terms in an IJV agreement are more flexible than those in an export sales contract. Second, parties to an IJV agreement are less legally restrained than those in an export contract. In other words, IJV partners have more leeway in stipulating relevant terms and clauses to align with their specific needs and interests. For instance, parties to an export contract must accept certain international definitions of standardized terms such as L/C, D/P, and D/A (three types of payment) and F.O.B., C.I.F., and C&F (three kinds of pricing). IJV agreements, however, are not constrained by such standards. IJV partners also have the right to ask for revisions after the agreement is concluded. Consequently, IJV negotiators often specify a special clause concerning the degree of obligability in defining the terms, how open they are to revision, and how the revisions would proceed. Different IJV agreements therefore vary in rigidity. The governance structure, the institutional matrix within which transactions are negotiated and executed, plays an important part in guiding IJV establishment and development (Williamson, 1979). Harmonizing interests that would otherwise give way to antagonistic subgoal

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pursuits appears to be an important governance function. Williamson (1979) suggests that simple governance structures should be used in conjunction with simple contractual relations, while complex governance structures should be reserved for complex relations. Contractual negotiations concerning IJV establishment is a complex process, characterized as long-term or recurrent (rather than occasional) and idiosyncratic (project specific). Negotiation transactions have a bilateral structure if the autonomy of the parties is maintained, and the transaction is removed from the market and organized within the venture subject to an authority relation. In this situation, contractual obligability is one of the ex ante internal levers that can mitigate future opportunism and conflict. It legally constrains each party during subsequent stages of IJV formation and operations. Under the classic contract law scheme, it is important to enhance discreetness and intensify “presentiation,” meaning that both parties should make an effort to perceive or realize all terms at present (Williamson, 1979). The economic counterpart to complete presentiation is contingent claims contracting, which entails comprehensive contracting whereby all relevant future contingencies pertaining to the supply of a good or service are described and discounted with respect to both likelihood and futurity. The scheme’s emphasis is placed on legal rules, formal documents, and self-liquidating transactions. It generally discourages thirdparty participation and narrowly prescribed remedies if the contract cannot continually proceed due to various reasons. The governance mechanism of the classic scheme is often too rigid for long-term businesses under uncertainty, as in the case of IJVs, but does point up the importance of clarifying obligations in the contract. The neoclassical contract law scheme emphasizes both contractual obligability and governance flexibility. It should be noted that high governance flexibility does not mean low contractual obligability. Instead, this flexibility is created in lieu of either leaving in contractual ambiguity or gaps or trying to plan too rigidly. Governance flexibility is devised to cope with changes in environmental contingencies by providing guidelines, which are legally binding to both parties, in the event of external changes. Normally, in long-term contracts executed under conditions of uncertainty, complete presentiation is apt to be prohibitively costly if not impossible. Under such conditions, obligatory contractual terms containing governance flexibility assist preventing breakdowns in the classic contract for long-term investment such as IJVs. It also fosters enforcement of the agreement and eventual payoff for both parties. In the neoclassical scheme, third-party (e.g., arbitrator) assistance in resolving disputes often has an advantage over litigation, and serves the functions of flexibility and filling contractual gaps. Recognition that the world is complex, agreements are incomplete, and some contracts will never be reached unless both parties have confidence in the settlement machinery thus characterizes neoclassical contract law. Neoclassical contract law has more power to explain contractual obligability in IJV establishment than the classic scheme. 4.4. Relationships between antecedent and concurrent factors 4.4.1. Environmental antecedents and concurrent factors The regulatory environment, especially from host government intervention, is likely to propel the need for term specificity. High specificity can reduce possible hindrance from various governmental authorities. Brouthers and Bamossy (1997) found that in emerging econo-

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mies, governments are key stakeholders who intervene significantly in IJV transactions. Such intervention can alter the balance of power between the parties and affect the bargaining consequences. Furthermore, the extent of such intervention is often dependent on location, time, industry, local partner, project contribution, export orientation, and technological level, adding uncertainty to the process. Grosse and Aramburu (1990) argue that term specificity can be used as a crucial safeguard against such uncertainty. This is in line with the transaction cost argument that the specification of transaction terms and conditions is an increasing function of the uncertainty of the environment in which investment is launched (Williamson, 1985). Term specificity thus performs as an important mechanism to reduce possible hindrance from various governmental authorities in the host country. In addition, when the regulatory intervention is high, topic inclusiveness becomes more constrained as foreign partners are usually left with no choice but to accept host government regulations. When this intervention is low, two parties would have more contractual options, thus higher topic diversity. Last, dynamics of the regulatory environment affect contractual obligability because the latter creates boundaries and suggests solutions when conflicts arise due to unexpected changes in the institutional context. As most regulatory hazards and institutional changes are out of organizational control, the hindrance from this environment will stimulate firms to maintain a lower level of contractual obligability. This may spur IJV parties to have a more flexible response to unexpected changes of the regulatory environment. The following relationships are thus proposed: Proposition 1: Intervention from the regulatory environment of a host country will be positively associated with term specificity and negatively associated with issue diversity and contractual obligability. The difference in national culture between IJV partners may translate into the difference in perceived importance of term codification and contractual obligability. The fewer the cultural barriers, the more likely the accurate interpretation of the transaction terms and conditions (Frances, 1991). A narrower cultural distance promotes information exchange (Graham, 1987), which is conducive to contract completeness. Parties from similar cultures are likely to specify major terms and conditions and heighten contractual obligability, rather than leave unnecessary leeway, which may cause future disputes and conflict (Fayerweather and Kapoor, 1976). By contrast, firms from countries separated by greater cultural distance are likely to stipulate relatively ambiguous terms and maintain relatively low obligability in the contract, and make necessary adjustments to these terms over time as they become more familiar with each other (Moran and Stripp, 1991). This establishes the operational flexibility that is necessary for parties from culturally distant nations (Salacuse, 1991). Therefore: Proposition 2: Cultural difference between partner countries will be negatively associated with term specificity and contractual obligability. Economic uncertainties may affect managerial perceptions about the consequences of investment, which in turn influences organizational behavior during contract negotiations. Whether IJV parties should choose high specificity or obligability to cope with future changes depends on whether these uncertainties are predictable and manageable. If they are unpredictable and cannot be controlled by either party, contractual flexibility may be neces-

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sary (Menard, 1997). This concurs with the contingency theory in that organizational mechanisms should maintain flexible if contextual hazards outweigh contractual forces or when environmental externalities are beyond organizational control (Lawrence and Lorsch, 1967). If, however, they are foreseeable and controllable, term specificity will work as an organizational system that prevents opportunism in a dynamic environment (Williamson, 1979) and mitigate possible hindrance over IJV operations from environmental hazards (Fayerweather and Kapoor, 1976). In this situation, economic fluctuations also heighten the need for obligability if both parties want to see the contract through to completion and attain maximum payoff from the joint venture. Thus, environmental controllability moderates the relationship between the economic environment and term specificity and contractual obligability. Therefore: Proposition 3: (a) When predictable and controllable, economic uncertainty will be positively associated with term specificity and contractual obligability; (b) when unpredictable and uncontrollable economic uncertainty will be negatively associated with term specificity and contractual obligability. 4.4.2. Organizational antecedents and concurrent factors Of the organizational antecedents, the relative balance of bargaining power between IJV parties may determine which party controls term specificity, issue diversity, and contractual obligability. When interfirm bargaining power is not commensurate, it will be difficult for both parties to reach a consensus on the necessary degree of term specificity, issue diversity, and contractual obligability. The party with a stronger bargaining position may manage the degree of contractual leeway by controlling contractual terms, topics, and obligations so that it can ensure that the terms eventually implemented will be in its best interest. Similarly, a partner’s stake in an IJV is also related to term specificity, issue diversity, and contractual obligability because the partner will be more cautious in transactions that involve long-term investment commitments (Hill, 1990). When a firm needs to make a considerable long-term commitment to the venture, it is necessary to stress and elevate contractual obligations. A partner’s stake is an important source of its bargaining power during negotiations. Term specificity, issue diversity, and contractual obligability during IJV negotiations will slope to a party with greater bargaining and investment stake. Therefore: Proposition 4: An IJV partner’s bargaining power and stake will be positively associated with its desired level of term specificity, issue diversity, and contractual obligability. Game theorists suggest that goal congruence reduces a player’s uncertainty about what another player will do, which may facilitate its best response to the predicted strategy of its partner. When two parties’s goals are different and thus use a distributive rather than cooperative strategy, one means by which the parties avoid costly mistakes is contract completeness (Fisher, 1980; O’Connor, 1997). Specifying terms, issues, and obligability concerning IJV formation, operations, and management will likely boost information exchange and transparency. In the presence of goal differences, contract gaps are more likely to plant the seed for subsequent opportunism and conflict. High specificity, issue inclusiveness, and obligability provide rules and procedures that may help IJV partners solve possible disputes or improve interpartner collaboration. Additionally, As stipulation and codification of contractual

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clauses vary according to riskiness, futurity, and orientation, the nature and complexity of an IJV transaction may influence term specificity, issue inclusiveness, and contractual obligability. In general, the more complex the transaction, the greater the necessity for specificity, inclusiveness, and obligability. This alignment helps ensure commitment from both parties and reduces possible instabilities generated from complex transactions. Therefore: Proposition 5: Goal difference and transaction complexity will be positively associated with term specificity, issue diversity, and contractual obligability. Options for avoiding or discontinuing negotiations may be inversely linked to term specificity, issue diversity, and contractual obligability. The more options each party has, the more likely the partners will not be willing to be bound by many obligations, including high specificity, inclusiveness, and obligability. In addition, previous cooperation between two firms provides an important foundation for subsequent negotiations. A longer history of such cooperation before forming an IJV spurs transparency and efficiency of interparty information exchange and interpretations (Rubin and Brown, 1975). This history also helps each party better appreciate a partner firm’s business strategy, organizational strength, and management style. A high level of conflicts and opportunism is hence less likely to occur. Under these circumstances, two parties may focus on a few key areas that are important to both parties rather than all issues in a standard IJV contract. Furthermore, previous cooperation may reduce the necessity to maintain high specificity and obligability because two parties cooperated earlier tend to be more collaborative and less opportunistic subsequently in a relational, long-term project (Williamson, 1979; Gibbons, 1992). Therefore: Proposition 6: Discontinuing options and previous cooperation will be negatively associated with term specificity, issue diversity, and contractual obligability. 4.4.3. Negotiator antecedents and concurrent factors Although the group effect of negotiator antecedents on term specificity, issue diversity, and contractual obligability may be not as strong as environmental or organizational contingencies, several negotiator attributes may have an influence on negotiation processes, especially on term specificity and contractual obligability. First, an individual’s personality or value system (i.e., terminal, instrumental, or intrapersonal) and cultural background may influence his or her attitude and approach to contracted obligations and term stipulations (Brett and Okumura, 1998). People with a strong interpersonal relationship orientation (e.g., guanxi in China, wa in Japan, and inhwa in Korea) may not favor having high term specificity and contractual obligability. Instead, they may pursue some way to provide for flexibility under terms in which both parties have confidence (Frances, 1991). Second, previous and existing relationship between negotiators may affect term specificity and contractual obligability. Better personal relationships lead to less specificity of terms perceived as relatively insignificant. Negotiators may shy away from stipulating terms that would punish a party in breach of the agreement if both parties want to maintain their existing long-term relationship (O’Connor, 1997; Rao and Schmidt, 1998). They may recognize the hazards of opportunism and restrict their flexible adjustments to where hazards are least. Third, when an IJV project is large and complex, it is often necessary to have more negotiators from each party. Topic inclusiveness may then increase as the number of negotiators increase. The greater number

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of negotiators from each party may also increase term specificity. By dividing groups, term negotiations are specialized, which in turn enhances term specificity in a consolidated contract. Last, the greater an individual’s knowledge of the business, the higher term specificity and issue diversity may be stipulated. Without such knowledge, detailed and all-inclusive speculations of major terms and clauses will be hampered. As IJV negotiations involve a great deal of knowledge in different arenas, term specificity and issue inclusiveness are likely to be an increasing function of this knowledge. Therefore: Proposition 7: (1) Negotiators with a strong interpersonal relationship orientation or having maintained superior personal relationships among themselves will favor low levels of term specificity and contractual obligability; (2) term specificity and issue diversity will be an increasing function of the number of negotiators or the level of their knowledge. 5. Consequences and relations with processes Both transaction cost and social exchange theorists maintain that negotiation outcomes are determined by negotiation process factors (Rubin and Brown, 1975; Williamson, 1985). As major concurrent constructs of contract negotiations, term specificity, issue diversity, and contractual obligability protect a partner’s strategic resources, mitigate against interfirm opportunism, and reduce operational and financial uncertainties (Williamson, 1985). These benefits in turn reduce transaction costs, enhance economic rents, and improve financial and operational synergies from interpartner cooperation. As important ax ante contractual mechanisms and institutional systems, these concurrent factors benefit IJV performance, which ideally benefits both parties. IJV performance is thus expected to be positively associated with term specificity, issue inclusiveness, and obligability. Broadly, the consequences of IJV negotiations fall into three sequentially interrelated categories: (1) immediate effect, (2) intermediate effect, and (3) ultimate effect. Because contingencies, both internal and external, will arise as an IJV evolves (Ring and Van de Ven, 1994), we can assume that the impact of contract negotiations will abate over time, implying that it is stronger immediately than intermediately or ultimately. 5.1. Immediate effect The sociopsychological perspective suggests that negotiation outcomes are sequential (Pruitt and Lewis, 1975; Rubin and Brown, 1975; Straus, 1978). Immediate consequences can be used to assess the outcome of IJV negotiations. First, in the event of a successful agreement, the outcome may be reflected in the extent to which negotiators are satisfied with the IJV contract. Second, in the event of a deadlock, one may examine whether alternative strategies can be devised to help unblock the stalemate. Third, in the event of a complete breakdown between IJV partners, both parties can withdraw and dissolve the negotiations. The third scenario therefore has only an immediate effect. The immediate effect is best manifested in satisfaction with IJV formation, ranging from high in the first case to moderate in the second and low in the third. In the process of IJV formation, a completed contract plays a pivotal role in determining

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formation success. In general, all major issues concerning IJV formation, including construction, registration, and commencement, are stipulated in an IJV contract. These terms provide explicit guidelines on how to set up an IJV. During the period from settling the contract to starting operations, there is little threat of opportunism or interpartner conflict. Therefore, contractual negotiations have a more direct and immediate impact on IJV formation satisfaction than on subsequent operational outcomes. Operational outcomes are contingent on additional factors that can not be fully articulated in contractual terms and clauses. Of the concurrent factors, term specificity clarifies the rules and responsibilities involved in such issues as project construction, location and size, equity sharing, resource contributions, board composition, nomination of top management, and so on. Specifying these terms facilitates IJV formation in accordance with the contract. To mitigate opportunism, ex ante safeguards such as complete coverage of various relevant negotiated terms are essential. A high degree of issue inclusiveness reduces the likelihood that the project will deviate from its desired course. Complete coverage of terms prevents loopholes that may hamper the new venture. Because of cultural and geographical distances between parties in different countries, forming an IJV often involves greater difficulty and a higher probability of failure, especially if these guidelines are absent. Thus, complete inclusiveness of issues may favor successful IJV formation. Lastly, contractual obligability is also conducive to IJV formation satisfaction. Having more obligations increases each party’s sensitivity to its duties and responsibilities, and thus its commitment to building a new IJV. Without obligability, one party may take an opportunistic “wait and see” attitude toward what the other party is doing, avoiding its own responsibilities until the partner firm has fulfilled certain duties. Therefore: Proposition 8: Term specificity, issue diversity, and contractual obligability will be positively associated with the success of IJV formation. 5.2. Intermediate effect The intermediate effects of negotiation consequences rest on the process-based performance of an IJV. Process-based performance dimensions may include technological development, product design, quality control, labor productivity, managerial and administrative efficiency, customer responsiveness, information flow, cost and budget control, and marketing effectiveness. Contract negotiations and specifications create explicit rules for operations that are necessary for enhancing superior efficiency and efficacy of production and management processes. Contractual stipulations and codification derived from completed negotiations provide guidelines to an IJV’s administration of major functional processes, such as marketing, production, human resource management, accounting and finance, and management. Such guidelines should also be flexible. This will help the IJV respond and adapt to emerging dynamics during operations based on principles agreed upon by both parties. This effect is intermediate because it links a negotiation’s immediate and eventual effects. Sequentially, the immediate effect, that is, the degree of satisfaction with the agreement, implies satisfaction with the specifications of various terms. This will foster performance in production and operation. Superior efficiency and effectiveness in production and operation processes will in turn boost eventual IJV performance. Term specificity helps each party get more accurate information regarding the duties,

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needs, and benefits, which then allows negotiators to make decisions that boost individual payoffs and joint rewards. Transparent and accurate information flow between parties within a venture elevates the effectiveness of production and organization processes. Issue diversity is also important to IJV process performance. The processes of managing production, marketing, purchasing, research and development, finance and accounting, human resources, and imports and exports are highly associated with the level and frequency of conflict because these areas are major sources of dispute between partners. Contractual guidelines reduce the variability of these processes. They create a foundation for solving possible disagreements that may arise in the entire process chain. Because an IJV is a long-term, uncertain investment, these guidelines can help stabilize IJV operations, management, and performance. As another concurrent factor, contractual obligability promotes forbearance and reduces opportunism by each party during the process of IJV operations and management. Having obligations helps each party commit to the IJV’s evolution and process development. Therefore: Proposition 9: Term specificity, issue diversity, and contractual obligability will be positively associated with an IJV’s process performance. 5.3. Ultimate effect The ultimate effects of negotiation consequences reside in the financial and overall performance of an IJV in the host country. Successful negotiation is one of the necessary conditions for IJV success. It provides a sound basis for interpartner cooperation, managerial rules, conflict resolution, and strategic direction, all of which are critical to the eventual success of the IJV. This success may be reflected in such indicators as profitability, market growth, competitive position, risk reduction, and overall performance. Such ultimate effects are linked with intermediate effects in that the latter serve as predictors of the IJV’s eventual performance. Without success in production, operation, and management processes, an IJV cannot attain high financial, market, and overall performance relative to its major rivals. Of the concurrent factors, term specificity protects a partner’s strategic resources, mitigates against interfirm opportunism, and reduces operational and financial uncertainties. These benefits may in turn reduce transaction costs, enhance economic rents, and improve financial and operational synergies from interpartner cooperation. Since term specificity helps ensure that an IJV will form, operate, and develop along the desired course, it may be conducive to the venture’s long-term evolution and growth. Term specificity may therefore benefit an IJV’s overall performance, providing benefits to both parties. Issue diversity may also be relevant to the overall performance of IJVs. According to Williamson (1979), creating a wide range of essential guidelines during negotiations helps harmonize interests that might otherwise give way to antagonistic subgoal pursuits. Guidelines nourish a collaborative environment and minimize opportunism. Since setting up an IJV necessitates a relational contract that involves highly idiosyncratic human and physical asset contributions, covering all issues completely during contract negotiation plays a prominent part in an IJV’s governance structure. IJV parties normally have an incentive to sustain their relationship rather than permit it to unravel, which would lead to the sacrifice valued transaction-specific economies. Covering topics comprehensively may help alleviate interpartner conflicts that would otherwise jeopardize this cooperation. Finally, contractual obligability legally binds each party’s be-

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havior, leading to expected benefits earned from joint venture operations. This binding spurs a partner’s long-term contributions and sustained commitment to overall success of the venture. The survival and growth of an IJV are tied into each party’s stakes when contractual obligability is high. Therefore: Proposition 10: Term specificity, issue diversity, and contractual obligability will be positively associated with an IJV’s financial and overall performance. It must be noted that the consequences of negotiations including immediate, intermediate, and ultimate effects may be perceived differently by IJV managers, local parent firms, and foreign parent firms. According to the “prisoner’s dilemma” in game theory, cooperation is not automatic because it is not in the interest of each player to behave cooperatively if there are no guarantees that the other players will reciprocate. Individual behavior leading to maximum joint payoffs does not necessarily result in maximum individual payoffs. Cooperation can be achieved by altering the incentive structure so that behavior that maximizes individual payoffs also maximizes joint payoffs (Gibbons, 1992). When more players are involved, collusion, opportunism, and information imperfection are normally intensified, which will compound the difficulties involved in achieving a subgame perfect Nash equilibrium for all parties. For every IJV, there are at least three players in the game: two parents and IJV management. Not only may two parent firms have idiosyncratic objectives, thus different perspectives toward negotiation outcomes, IJV managers may also differ from their parent firms in their perceptions of IJV processes and overall performance. Because of agency costs, venture managers seek their own benefits or, at best, those of the venture. Generally, when goal congruity between two parents is high, there will be a higher conformity between perceived outcomes by different parent firms and IJV management. In analyzing a specific negotiation, it is necessary to define clearly which perspective the study takes in assessing its consequences. Figure 1 schematically summarizes a conceptual framework of IJV contract negotiations. The interrelationships between specific factors are outlined in Figure 2. 6. Concluding remarks Contract negotiation is an important determinant of IJV success. Negotiating is, however, a complex process involving a number of multilevel antecedent, concurrent, and consequent factors. Building on a sociopsychological perspective, together with transaction cost theory, this article presents an integrated conceptual framework of IJV negotiations in a general context. It articulates various antecedents of IJV negotiations at three levels: environmental, organizational, and individual. Concurrent factors in the IJV negotiation process include term specificity, issue diversity, and contractual obligability. The consequences of IJV negotiation are sequential, including immediate (IJV formation satisfaction), intermediate (IJV process performance), and ultimate (IJV overall performance) effects. Contractual negotiations concerning IJV establishment involve antecedent, concurrent, and consequent factors that are interlocked and mutually influential in sequence. Such interrelationships are complex and multidimensional. The influence of each factor on other covariates is not necessarily homogeneous in terms of both the direction and magnitude. Some antecedents may have a greater impact on term specificity while others may be more strongly associated with issue

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Fig. 1. A conceptual framework of IJV contract negotiations.

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Fig. 2. Predicted relationships among antecedent, concurrent, and consequent factors.

diversity or contractual obligability. Similarly, the concurrent factors are not likely to equally affect an IJV’s immediate, intermediate, or ultimate performance. International business researchers may empirically validate this conceptual framework by seeing if it is pertinent to concrete IJV negotiations and whether such a complex and interactive multidimensionality unfolds. International managers may use this framework as a generic guideline, adapting it to external or internal contingencies that they face. References Adler, N.J., Brahm, R., Graham, J.L., 1992. Strategy implementation: a comparison of face-to-face negotiations in the People’s Republic of China and the United States. Strat Manage J 13, 449–466.

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