Joy  Elly  Tulung  –  PhD  Student  

INSTITUTIONS,  RESOURCES,  AND  ENTRY  

STRATEGIES  IN  EMERGING  ECONOMIES  

INTERNATIONAL  JOINT  VENTURES  AND  THE  VALUE  OF  GROWTH  OPTIONS  

AGENCY  COSTS  AND  THE  PERFORMANCE  IMPLICATIONS  OF  INTERNATIONAL  JOINT  VENTURE  

INTERNALIZATION  PARENT  FIRM  PERFORMANCE  

ACROSS  INTERNATIONAL  

JOINT  VENTURE  LIFE-­‐CYCLE  STAGES    

Appropriate  mode  of  entry  

is  a  fundamental  decision  for  

MNEs  

Previous  research  

focused  on  two  major  

entry  modes  (acquisitions  &  greenfields)    

analysis  includes  

brownfield  investment  

Mode  Choice  

Resource  availability  

Strategy  of  a  MNE  

Resource  availability/strategy  

Transaction  Cost  Theory  (TCT)  

Resource  Based  View  (RBV)    

Integration  and  Adaptation  Costs  (I&A)  

•  assets,  e.g.  technology,  market  power,  brand  name,  reputation,  local  customer  base  and  distribution  channels  

Resources  of  the  Local  Firm  

• transferable  knowledge,  managerial  service  and  financial  capital  

Resources  of  the  Investor  

• real  estate,  labor  skills,  and  access  to  utilities    

Resources  available  on  the  Market  

Brownfield  Investment  Formally  an  acquisition,  but  it  closely  resembles  the  greenfield  in  its  

organization  

Purchase  of  an  existing  firm,  which  within  a  short  period  of  time  is  totally  restructured    

Local  resources  replaced  with  resources  of  the  investor  

The  advantages  of  brownfield  may  compensate  for  the  downsides  of  greenfield  entry    

Brownfield  is  an  attractive  alternative  entry  mode  for  global  companies  investing  in  transition  economies  

 

Global  Strategy  

Multidomestic  Strategy  

Klaus  Meyer,  Saul  Estrin,  Sumon  Bhaumik,  Mike  Peng    

Institution  

The  rules  of  the  games  

Efficiency  of  Market  

• Contract  enforcement  • Information  Asymmetry  • Mechanism  • uncertainty  

Transaction  Costs  

• Finding  partners  • Negotiating  and  enforcing  contract  • Measures  quality  of  products  • etc  

Business  Strategies  

Design  the  organizational  forms  

that  minimize  opportunity  costs  (Max.  Revenue)  

¡  “how  do   foreign  firms  adapt  entry  strategies  when  entering  emerging  economies?"  

Entry  Mode  Choice  (Kogut  &  Singh,    1988;  Anand  &  Delios,  2002;  Elango  &  Sambharaya,  2004)  •  Greenfield  •  Acquisition  •  JV  

Institution  and  Entry  Strategy  •  Legal  Framework  and  Enforcement  

•  Property  Rights  •  Information  Systems  •  Regulatory  Regimes  

• The  stronger  the  market-­‐  supporting  institutions  in  an  emerging  economy,  the  less  likely  foreign  entrants  are  to  enter  by  joint  venture  (as  opposed  to  greenfield  or  acquisition).  

Hypothesis  1(H1):  

• The  stronger  the  need  to  rely  on  local  resources  to  enhance  competitiveness,  the  less  likely  foreign  entrants  are  to  enter  an  emerging  economy  by  greenfield  (as  opposed  to  acquisition  or  joint  venture).  

Hypothesis  2a  (H2a):  

• The  effect  of  Hypothesis  2a  is  stronger  when  requiring  intangible  assets  compared  to  tangible  assets.  

Hypothesis  2b  (H2b):  

• Under  conditions  of  strong  institutions,  the  greater  the  need  of  foreign  entrants  for  intangible  resources,  the  more  likely  they  are  to  use  acquisition  or  joint  venture  rather  than  greenfield.  

Hypothesis  3a  (H3a):  

• Under  conditions  of  strong  institutions,  the  need  for  local  tangible  resources  will  not  influence  the  choice  of  entry  mode.  

Hypothesis  3b  (H3b):    

¡  Sample  §  Four  emerging  economies    ▪  Egypt,  India,  South  Africa,  and  Vietnam  

§  Questionnaire  §  Base  Population  §  Random  Sampling  §  Interviews  §  613  responses  were  received  

Institutional  and  resource  effects  crucially  interact.    

Strengthening  the  institutional  environment  directly  encourages  acquisition  and  greenfield  entry  at  the  expense  of  JV  entry.  

First,  a  pertinent  question  for  empirical  studies  is  always  whether  the  empirical  relationships  identified  in  the  study  could  be  explained  by  different  mechanisms  than  those  proposed  by  the  authors.  

A  second  concern  is  the  quality  of  proxies.  They  collected  local  data  to  get  as  close  as  possible  to  the  context  (the  focus  of  our  research),  and  thus  distinguish  ourselves  from  earlier  study  designs  driven  by  MNE  headquarters  perspectives.  

Third,  They  only  investigate  equity-­‐based  foreign  entry  modes  (Tse  et  al.,  1997)  and  do  not  differentiate  levels  of  subsidiary  ownership  (Dhanaraj  and  Beamish,  2004).  

Jeffrey  J.    Reuer  &  Kent  D.    Miller    

Parent  firm  performance  implications  of  joint  venture  (JV)  investments.    

Event   studies   generally   find   a   positive   average   shareholder  wealth  effect  associated  with  venture  formation.  Balakrishnan  &Koza  (1993);  Chen,  Hu,  &Shieh  (1991);  Crutchley,  Guo,  &Hansen  (1991);  Koh  &Venkatraman  (1991);  Lummer  &McConnell  (1990);  and  McConnell  &  Nantell  (1985)  

JVs   frequently   fail   to   meet   parent   firms’   objectives,   and   are   often  unstable   and   short-­‐lived.   Beamish,   (1985);   Kogut,   (1988,   1989,1991);   Blodgett  (1991,   1992);   Gomes-­‐Casseres   (1987);   Harrigan   (1985,   1986,   1988);   Killing   (1983);   Li(1995  );Mitchell  &  Singh(  1992);  and  Pennings,  Barkema,  &  Douma  (1994)  

While   scholars   have   typically   associated   JV   longevity   with  collaborative   success   and   JV   termination   with   failure.   Anderson  (1990);  Brown,  Rugman,  and  Verbeke  (1989);  Dymsza  (1988);  Parkhe  (1991);  Ring  and  Van  de  Ven  (1994);  and  Teece  (1992)  

¡  Recent  event  studies  of  JV  formations  agency  theory  may  be  useful  for  isolating  the  sources  of   parent   firm   valuation   effects   from   JV  investments.  

¡  Lee   and   Wyatt   (1990)   conjectured   that  agency   problems  may   be   at   the   root   of   the  negative   shareholder   wealth   effects   for   the  international   joint   venture   (IJV)   formations  they  studied.    

¡  The   aim   of   this   study   is   to   join   standard  agency   theory   arguments   and   event   study  methodology   to   test   a   contingency  perspective  on  IJV  buyouts.  

Empirical  research  has  found  that  parent  firm  inside  ownership  is  positively  related  to  stock  price  movements  

associated  with  JV  formations  (Cordeiro,  1993;  Wild,  1994).    

Wild  (1994)  observed  that  IJV  formations  also  create  more  wealth  for  parent  firm  shareholders  when  parent  firms  have  low  levels  of  free  cash  flow  or  have  high  financial  leverage  for  a  given  

level  of  free  cash  flow.    

Cordeiro  (1993)  reported  that  parent  firm  abnormal  returns  from  JV  formation  are  also  more  favorable  in  the  presence  of  long  term  

performance  plans  and  interlocking  directorates.  

• Abnormal  returns  for  the  U.S.  parent  internalizing  an  IJV  will  be  positively  related  to  the  U.S.  parent  firms’  inside  owner-­‐  ship  percentage.  

Hypothesis  1:  

• Abnormal  returns  for  the  U.S.  parent  internalizing  an  IJV  will  be  negatively  related  to  the  U.S.  parent  firm’s  free  cash  flow.  

Hypothesis  2:    

• Abnormal  returns  for  the  U.S.  parent  internalizing  an  IJV  will  be  positively  related  to  the  interaction  of  the  U.S.  parent  firm’s  leverage  and  free  cash  flow.  

Hypothesis  3:    

¡  U.S.  investment  abroad  contained  in  Mergers  &  Acquisitions  

¡  75  IJV  ¡  23  different  primary  industries  ¡  located  in  23  different  countries  ¡  7-­‐year  period  ¡  1988  -­‐  1994.    ¡  OLS  parameter  ¡  cross-­‐section  

parent  firm  valuation  effects  are  positively  related  to  the  parent  firm  equity  owned  by  insiders  and  the  interaction  of  debt  financing  and  free  cash  flow.    

¡  Data   Limitations   in   regards   to   investigate  potential   asymmetries   in   parent   firm  performance  effects  

Tony  W.  Wing,  Jeffrey  J.  Reuer,  and  Mike  W.  Peng  

The   aim   of   this   article   is   to   extend   the   real   options  theory  of  JVs  by  accomplishing  two  objectives.    

•  First,  this  article  bridge  the  gap  between  theory  and  evidence  by  directly   testing   the   theory’s   central   proposition   that   JVs   confer  valuable  growth  options.  

•  Second,  and  related,  objective  is  to  develop  a  contingency  view  of  growth   options   in   IJVs   by   examining   how   some   key   IJV  characteristics   can   differentially   affect   firms’   growth   option  values   rather   than   invoking   real   options   arguments   in   a  universalistic  fashion  or  assuming  they  apply  to  all  such  ventures.  

Real  Options  Theory  

G r o w t h  Option  Value  

Real  Options  Theory    

Joint  Ventures  

•  The  greater  a  firm’s  number  of  IJVs,  the  greater  its  growth  option  value.  

International  Joint  Ventures  -­‐  Hypothesis  1.    

•  The  number  of  a  firm’s  minority  IJVs  has  a  greater  impact  than  the  number  of  its  nonminority  IJVs  on  the  firm’s  growth  op-­‐  tion  value.  

The  Ownership  Structure  of  IJVs    -­‐  Hypothesis  2.    

•  The  number  of  a  firm’s  noncore  IJVs  has  a  greater  impact  than  the  number  of  its  core  IJVs  on  the  firm’s  growth  option  value.  

The  Product-­‐Market  Focus  of  IJVs  -­‐  Hypothesis  3  

•  The  number  of  a  firm’s  IJVs  in  emerging  economies  has  a  greater  impact  than  the  number  of  its  IJVs  in  developed  economies  on  the  firm’s  growth  option  value.  

The  Geographic  Location  of  IJVs  -­‐  Hypothesis  4  

•  1,000  largest  U.S.  publicly  traded  companies,  based  on  their  market  value  added  (MVA)  

• Besides  MVA,  the  data  set  also  pro-­‐  vides  Stern  Stewart’s  estimates  of  other  value-­‐  based  measures,  such  as  economic  value  added  (EVA),  capital  invested  (CI),  and  the  weighted  av-­‐  erage  cost  of  capital  (WACC)  

Sample  and  Data  

• Growth  option  value    •  Explanatory  variables  • Control  variables  

Variables  and  Measurement  

•  Several  theoretical  and  practical  considerations  drove  our  decision  to  use  panel  data  models  to  estimate  the  influence  of  various  types  of  IJVs  on  a  firm’s  growth  option  value.  

Analytical  Approach  

Through  the  use  of  real  options  theory  in  the  IJV  context,  this    research  also  contributes  to  the  IJV  literature  by  uniting  three  important  IJV  attributes:  ownership  structure,  product-­‐market  focus,  and  geographic  location.  

diversifying  IJVs  might  provide  one  explanation  for  the  contradic  tory  results  in  prior  studies.  

that  firms  do  not  generally  derive  growth  option  value  from  their  IJVs  in  emerging  economies  in  certain  ways  challenges  recent  arguments  that  growth  options  provide  an  important  rationale  for  firms’  investments  in  these  locations  .  This  findings  may  reflect  the  high  failure  rate  of  JVs  in  general,  and  in  emerging  economies  in,  yet  other  more  specific  explanations  are  also  plausible.  

¡  The  findings  also  challenge  recent  claims  about  the  growth  option  value  of  investments  in  emerging  economies.  

Used  of  the  Stern  Stewart  data  set  helped  this  obtain  a  relatively  accurate  estimate  of  growth  option  value.  Although  this  is  a  contribution  of  the  article,  it  might  limit  the  generalizability  of  the  findings.    

Opportunities  also  exist  to  extend  the  empirical  approach  to  other  international  investments  contexts  where  real  options  theory  is  applicable.  

This  paper  focus  on  JVs  concerns  firms’  external  corporate  development  activities,  but  a  wide  range  of  internal  investment  activities  can  similarly  provide  valuable  growth  options,  such  as  investments  in  technology  development  projects  and  investments  in  new  product  lines.  

Jeffrey  J.  Reuer  INSEAD  

Total  Value  Parent  Firms  

International  Joint  Venture  

 •  Investment  Decision  

•  Processes    •  Broader  Strategic  Events  •  Environmental  Context  

¡  Examine   parent   firm   performance   outcomes  across   IJV   life-­‐cycle   stages   by   using   event  study,   methodology   to   evaluate   the  shareholder   wealth   effects   of   IJV   formation  and  IJV  Termination  

How  do  the  shareholder  wealth  effects  of  IJV  formation  and  IJV  termination  relate  to  each  other?  More  specifically,  to  what  extend  are  the  valuation  patterns  consistent  with  sequential  adaptation,  corrective  

decisions,  inappropriate  termination  of  attractive  ventures  or  simply  poor  management?    

What  are  the  parent  firm  valuation  effects  of  IJV  formation  and  different  types  of  IJV  termination?  

Research  Question  

The  corporate  effects  of  collaboration  by  investigating  the  reactions  of  parent  firm’s  share  prices  to  announcements  of  alliance  formation  

•  (Das,  Sen  &  Sengupta,  1998;  Koh  &  Venkatraman,  1991)  

The  effects  of  alliances  on  parent  firm  survival  

•   (Singh  &  Mitchell,  1996)  

Parent  firm  or  IJV  managers’  perceived  satisfaction  with  IJVs  

•  (  Geringer  &  Herbert,    1991)  

The  parent  firm  valuation  implications  of  IJV  formation  has  produced  rather  mixed  findings  •  Firms  generally  obtain:  •   Positive  abnormal  return  when  announcing  the  formation  of  on  IJV  (Chen,  Hu  &  Shieh,    1991;  Grutchley,  Guo  &  Hansen,  1991;  Gupta,  McGowan,  Misra  and  Missirian,  1991)  

• An  average  valuation  effect  that  is  negative  (Chung,  Koford,  &  Lee,  1993;  Lee  &  Wyat,  1990)  

•  Insignificant  (Finnerty,  Owers,  &  Rogers,  1986;  Merchang,  1997)  

• Predicast’s  Funk  and  Scott(F&S)  Index  and  Lexis-­‐Nexis  Company  news  Library  

• US  Parent  firms  • The  Venture  based  outside  US  • 1985-­‐1995  • 215  IJV’s  • Average  year  6.7  • 35  Countries  

Sample  

• Event  Study  methodology  

Methodology    

Provide  evidence  that  both  IJV  formation  and  IJV  termination  

life-­‐cycle  stages  hold  out  opportunities  for  parent  firms  to  create  shareholder  value  

Valuation  patterns  reported  here  also  reveal  the  

complexity  of  the  relationships  between  IJV  life-­‐cycle  stages  

and  the  performance  implications  for  parent  firms.  

The  present  evidence  for  IJVs  reveals  interesting  similarities,  as  well  as  differences,  with  prior  findings  on  alternative  

corporate  investments  such  as  acquisitions  and  divestitures  

The  evidence  on  the  shareholder  wealth  effects  of  IJV  

termination  indicates  the  importance  of  this  stage  of  the  IJVs  life  cycle  in  determining  the  total  value  that  a  firm  derives  or  

loses  from  collaboration  

The  empirical  results  suggest  a  place  for  transitional  collaborations  in  firms’  corporate  portfolios  

Alliance  writings  have  a  long  emphasized  flexibility,  risk  

sharing,  and  low  switching  costs  as  important  benefits  of  

alliances.  

The  present  paper’s  international  focus  reflect  the  significance  of  IJVs  in  parent  firms’  corporate  strategies  and  the  fact  that  much  of  the  literature  on  JV  instability  has  been  developed  in  the  IB  field  

Similar  research  also  could  be  conducted  in  a  domestic  setting  

Event  study  methodology  is  also  limiting  in  some  important  respects  

THANKS  FOR  YOUR  ATTENTION