Three’s a Crowd?

Diversity can be the engine that drives successful international joint ventures. But diversity can also destroy them with schoolyard behaviour

The essentials

  • Previous research has shown that international joint ventures (IJV) involving three or more partners are less stable than than those with only two partners.
  • According to a study of 248 multi-party IJVs in China, there’s a greater chance of cliques (sub-groups) forming when there’s an imbalance in the partners’ national backgrounds. And when sub-groups form, there is a greater chance that the IJV dissolves.
  • Sub-groups in multi-party IJVs can wreak havoc on information flows among the partners and distract the group from the joint venture’s larger goals.
  • IJVs are more likely to dissolve when there is a disparity among the partner firms’ national backgrounds. It is not so much a case of clashing cultures as it is clashing values that are shaped by the norms of their host countries.

Anthony Goerzen shares the story of a former general manager of an international joint venture (IJV) involving a foreign firm and two local firms. The general manager told Goerzen, a long-time researcher of international alliances, that the local partners ‘‘ganged up’’ on the foreign firm to block important strategic initiatives. The behaviour of the clique became so intolerable that the foreign partner eventually decided to dissolve the IJV.

To Goerzen, a professor at Smith School of Business, this tale reveals one of the underappreciated challenges of operating IJVs involving more than the traditional two partners. Multi-party IJVs introduce group and cultural dynamics and complex coordination challenges that firms often overlook. Indeed, previous research has suggested that these arrangements are less stable than two-party IJVs, but the reasons why have been unclear.

A recent study by Goerzen and research colleagues Alex Mohr of University of Kent and Chengang Wang of Bradford University is starting to clear up the confusion.

Their work is certainly timely. IJVs are a staple of today’s tightly-knitted global economy, and many involve three or more partners, reflecting the increasing complexity of projects and the need for highly specialized expertise.

“What we're seeing in many markets and many technologies is that solutions are much more nuanced and technical and no one firm can house all that information and knowledge,” says Goerzen.

Strength in Numbers or Speed Bumps?

Bringing many firms from different countries together into a joint venture would seem to address those challenges. It would lead to a wider and deeper knowledge pool, larger social networks, greater opportunities for synergies, and better access to resources.

But it would also introduce some significant speed bumps: the potential for hidden free-riding behaviour, higher coordination and management costs, and the formation of cliques or sub-groups.

“We need to think about how an organization fits inside the group that’s being created rather than just simply looking at what the firm is bringing to an IJV in terms of resources and capabilities”

To drill deeper, Goerzen and colleagues conducted a study that looked at data from 248 multi-party IJVs in China, mostly in the manufacturing sector. The researchers studied these joint ventures through the lens of diversity, specifically the variety, disaprity, and balance of national backgrounds of partners and the regulatory and cultural differences among partner firms’ home countries. 

The study found that there’s a greater chance of sub-groups forming when there is an imbalance in the partners’ national backgrounds. And when sub-groups form, there is a greater chance that the IJV dissolves.

How Cliques Undermine IJVs

Cliques can be equally hard to handle in a schoolyard across the street as an IJV in China. As the researchers note in their paper, published in the journal International Business Review, sub-groups “increase the risk that flows of information and resources among sub-group members will displace flows between firms within and outside the sub-group, increasing outsider firms’ incentives to terminate an MPIJV.”

As well, sub-groups of partners in unbalanced multi-party IJVs are more likely to strive for outcomes that are beneficial to the sub-group members but not necessarily advantageous for the remaining partner firms or for the venture as a whole, the researchers note.

The study also found that IJVs are more likely to dissolve when there is a disparity among the partner firms’ national backgrounds. It is not so much a case of clashing cultures as it is clashing values that are shaped by the norms of their host countries. Examples would be differing views on how to handle requests for bribes or prevent infringement of intellectual property rights.

“We went in thinking that national cultural differences should cause the most difficult issues,” says Goerzen. “What we found, however, was that organizations' cultural values — what the organizations are there to do and how they go about it — seem to be much more potent than national cultural differences. When firms have similar values and basic goals, then some of these other attributes  that might seem big are actually not so big.”

The study offers some guidance to firms interested in assessing the dynamics of a multi-party IVJ. When a firm enters or leaves an IVJ, for example, it could trigger a change in the balance of the existing partners, potentially leading to the creation of new sub-groups.

“We need to be thinking about how an organization fits inside the group that’s being created rather than just simply looking at what the firm is bringing to an IJV in terms of resources and capabilities,” says Goerzen. “What this research starts to highlight is that when these partners get together, you can find that organizations behave differently inside the group and that they align based on similarities and differences.”

Alan Morantz

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