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International joint ventures (IJVs) are perceived as essential strategic weapons by which firms can transfer the complex complementary competencies needed for competitive advantage within firms' core markets and technologies. This study attempts to explore the relationship of inter-partner credible threat and the survival of IJVs in China. The study found that the existence of inter-partner credible threat, and high product relatedness between foreign parent and IJV, favorably influence the IJV's long-term survival.
Introduction
The proliferation of international joint ventures (IJVs) in emerging economies, particularly in China, in the last decade, has stimulated great research interest. They are perceived as increasingly important strategic weapons by which firms can transfer the complex complementary competencies needed for competitive advantage within firms' core markets and technologies (Harrigan, 1986). Beamish (1994) described joint ventures, the most common form of strategic alliance, as the dominant strategy used by multinational firms in emerging markets. International joint ventures have been widely considered as hybrid forms of organizations which aim to bring together complementary skills, know-how and resources of two or more parent firms to accomplish specific objectives. The cross-cultural and inter-firm nature of IJVs are key sources of the additional complexities and challenges in the management of an IJV.
Although IJVs have become increasingly important in emerging markets, a high level of dissatisfaction with actual outcomes relative to expectations has been reported (Hitt, Levitas, Arregle & Borza, 2000; Madhok & Tallman, 1998). Of the particularly critical decisions, partner selection has been seen as especially important to a venture's success (Geringer, 1988; Saxton, 1997). In an international setting, differences in culture, infrastructure, economic development, and government policies increase the complexity and the vitality of the partner selection (Dacin, Hitt & Levitas, 1997). However, previous empirical studies on partner selection tend to focus on the organizational characteristics of partners, such as strategic symmetry (Harrigan, 1988), inter-firm diversity (Parkhe, 1991), match of partner characteristics (Geringer, 1988), and inter-partner compatibility (Beamish, 1988; Hill & Hellriegel, 1994; Inkpen, 1995; Inkpen & Currall, 1998). In essence, the emphasis is on the cooperative aspects of venture partners. The use of economic constraints and mechanisms such as the inter-partner credible threat in curbing opportunistic behavior of partners, and its impact on the venture's performance, have not fully been explored. Following the tradition of game theory application in the study of joint ventures (Heide & Miner, 1992; Parkhe, 1991), Zhang and Rajagopalan (2002) argued that inter-partner credible threat plays a more important role than partners' management control in determining partners' payoff in IJVs. He defines inter-partner credible threat as the certainty of either partner's retaliation given that the other partner cheated earlier (Zhang & Rajagopalan, 2002). The existence of inter-partner credible threat will not only reduce IJVs coordination costs, but also enhance partners' cooperative behaviors and result in better performance. Coordination costs are the expenses in monetary terms, as well as managerial time and effort that the partners incur in the process of composing tasks and coordinating activities across organizational boundaries (Zhang & Rajagopalan, 2002).
This study attempts to test the theoretical predications on the use of inter-partner threat and its impact on IJV performance. Alter the introduction, we briefly review the literature of joint venture partner selection and joint venture performance. Then we develop our hypotheses. Next we describe our sample and research method, followed by a discussion of the statistical analysis. Then we conclude with the theoretical and practical implications of the study.
International Joint Venture Partner Selection and Performance
The analysis of IJV performance determinants and their relationships with local partner selection has commanded considerable research efforts in the past. Previous research has progressed along two main theoretical paths. First, some researchers have focused on resources exchange and the value of the resource accessed in an IJV (Saxton, 1997). Geringer (1988) argued that selection of an IJV partner should consider a fit, both for task-related characteristics (e.g., resources and skills) and for partner-related characteristics (e.g. size, objectives, and operating policies). Harrigan (1986) proposed that IJV performance depends on strategic symmetry between the partners, which occurs when they "possess complementary strategic missions, resource capabilities, managerial capabilities, and other attributes that have a strategic fit such that the relative bargaining power of the partners is evenly matched" (Harrigan, 1986, pp. 11).
Using variables of inter-partner relatedness, parent-venture relatedness, and the relative size, nationality, and IJV experiences of the parent firms, Harrigan reported positive relationships between partners' strategic symmetry and venture survival (Harrigan, 1988). Hitt et al. (2000) provided some evidence to support the resource-based perspective as to why firms select particular partner. Their study showed that emerging market firms emphasized the partner's financial assets, technical capabilities, and intangible assets, whereas developed market firms emphasized the partner's unique competencies and local market knowledge and access.
Other researchers have focused on the interactive nature of cooperation between the partners in the ventures (Heide & Miner, 1992; Parkhe, 1991 ; Saxton, 1997). Researchers in this tradition emphasize the use of economic and social mechanism to sustain the ongoing relationship between the partners involved, not the resource per se. Partners within IJVs are assumed to have the potential for opportunistic behavior (Reich & Mankin, 1986). The use of economic constraints, such as the investment of specific assets and other arrangements, may reduce the potential for opportunism by locking partners into a strategic alliance, with the expected long-term gains from maintaining the relationship exceeding the potential short-term gains from opportunism (Parkhe, 1993). Zhang and Rajagopalan (2002) proposed that inter-partner credible threat, as defined as 'the certainty of either partner's retaliation given the other partner's earlier cheating,' may serve as an effective mechanism to curb the potential opportunism of partners, and consequently affect the venture's performance.
In reviewing previous research, we have founded that insufficient attention has been paid to empirical study testing the effectiveness of economic constraints to enhance cooperative behavior of partners. In this study, we attempt to examine the inter-partner credible threat as a deterrence mechanism and its effect on the performance of IJVs.
Hypotheses
To explore and identify the key ingredients of successful IJVs is of paramount importance to IJV researchers as well as to IJV practitioners. The measurement of the performance of IJVs itself has been an important research topic in the field of international management (Arino, 2003; Geringer & Hebert, 1991 ; Olk, 2002; Yan & Zeng, 1999). The validity of the different measures has been questionable (Arino, 2003; Olk, 2002). For example, many researchers have used the IJVs' survival as a proxy of their performance measure (Harrigan, 1988; Hennart, Kim & Zeng, 1998; Li, 1995; Makino & Beamish, 1998). Although Geringer and Hebert (1989) have found a significant positive correlation between objective measures using survival, stability and duration, and subjective measures of performance, Arino (2003) argued that operational measures of strategic alliance performance, such as survival or longevity, can be related to performance only in particular instances. These instances require some knowledge of the temporal nature of the partners' goals for the IJVs. Because exit/termination of an IJV may be anticipated or "planned" by the partners, from the outset (Inkpen & Beamish, 1997), previous empirical studies that simply count the death rate, without the knowledge of the founding partners' intentions, were conceptually flawed (Yan & Zeng, 1999). Therefore, in this study, we use IJVs' survival rates against a pre-determined duration to measure IJVs' performance. A detailed discussion of this measure will be presented in the following section.
The construct, inter-partner credible threat, is derived from a game theory framework (Zhang & Rajagopalan, 2002). Zhang and Rajagopalan illustrates the inter-partner credible threat using a one-stage 'prisoner's dilemma' model and an infinitely repeated 'prisoner's dilemma' model. In essence, the existence of credible threat in an ongoing cooperative relationship will reduce the coordination cost between partners, by aligning the incentive/payoff of partners. For instance, in the one-stage prisoner's dilemma, the two sponsoring firms simultaneously choose a strategy to control the IJV (high level control vs. low level control). If both partners choose the high level control strategy, then the payoff will be relatively low, due to the high coordination costs. On other hand, if both partners choose low level, then the payoff will be relatively high, due to the low coordination costs. Since most IJV partners have different, and often conflicting interests, it is highly unlikely that they would voluntarily opt for the low level control. Given these differences, each partner may choose to maximize their own payoffs rather than the overall payoffs. This reduces IJVs to 'forums ofrivalrous control' (Zhang & Rajagopalan, 2002). Zhang and Rajagopalan suggest that interpartner credible threat can break this circle of rivalrous control. Partners will have to weigh the payoffs from cooperation and cheating. Partners will tend to stick to the cooperative strategy as long as payoffs from cooperation outweigh those from cheating. This will increase the overall payoffs of the IJV and its overall performance and longevity. Because this mechanism does not require substantial investment in relationship building and coordination, the long term economic efficiency can positively affect the IJV's performance. Therefore, we developed the following hypothesis:
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