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Research Brief: Why Picking Partners in a Shady Country is so Difficult

The quality of host country governance drives trustworthy behaviour in International Joint Ventures

Research Brief: Why Picking Partners in a Shady Country is so Difficult

WHAT DID THE STUDY LOOK AT?

Previous research has shown that a country’s governance infrastructure — a legal system that protects property and individual rights and public institutions that are stable and credible — significantly influences the behaviour of multinational enterprises operating in that country. If that’s the case, would host country governance also influence the extent to which a partner in an International Joint Venture (IJV) behaves in a trustworthy manner? 
 

HOW WAS THE STUDY DESIGNED?

The study focused on 144 IJVs established by U.S. and Canadian firms in six Asian countries. Only IJVs between three and 11 years of age were sampled, to ensure a sufficiently long period in which to observe partner trustworthy behaviour. Data were collected on host country governance (using the World Bank’s Governance Index), partner selection criteria, and partner trustworthiness (as measured by an existing scale). Two dimensions of trustworthy behaviour were examined: benevolence, seen in a firm’s willingness to protect the interests of its partner; and competence, the ability of a firm to contribute to the partnership’s goals with the necessary resources. Partner criteria included: “partnering intent” (attributes that reflect a partner’s similarity to the focus firm), “factors of production” (attributes that reflect a partner’s strategic assets), and “political capital” (attributes that reflect a partner’s relationships with politically-oriented constituents).

WHAT DID THE STUDY FIND?

  • The quality of host country governance is an important driver of trustworthy behaviour in cross-border exchange relationships. 
  • The rule of law, minimal corruption, effective government bureaucracies, and political stability provide the “security, support, and encouragement necessary for firms to behave in a benevolent and competent manner.” 
  • In countries with weak governance, IJV partner firms are more opportunistic and tend to withhold resources needed to strengthen a partnership. 
  • Partner selection criteria influence the likelihood of selecting a trustworthy IJV partner.
  • Governance quality enhances the effectiveness of the following partner selection criteria: partnering intent, factors of production, and political capital.  

WHAT DO I NEED TO KNOW?

This research is a wake-up call for those executives willing to gloss over the host country’s governance institutions before entering into an IJV. As the researcher notes in his journal article, “Managers need to understand that while utilizing IJVs they are exposing their firm to greater moral hazards in the form of elevated opportunism, resource withholding, and antisocial behaviours, all of which undermine the chances that their partner will behave benevolently and competently.”

To ensure you know what you’re getting into, IJV planners should size up the host country’s legal and political institutions as well as assess the kind of partner that is the best fit. Looking for a “benevolent” IJV partner in a host country with solid governance? Place greater importance on character, partnering intent, and partnering ability. For a “competent” partner? Focus on attributes relating to market power, factors of production, and political capital.

To best mitigate the risks inherent in host countries lacking quality governance, the researcher suggests, executives “should focus on identifying potential partners that are industry leaders, transparent, ethical, and have a positive reputation and successful partnering record.” Verify information with multiple credible sources gathered from impartial consultants or other contacts.

In shady host countries, firms have a strong need to develop alternative ways to promote trustworthy behaviour. The upside is that executives who learn how to manage the idiosyncrasies of the IJV’s host market “would enhance the competitiveness of their firm by better capitalizing on the opportunities in hostile environments.”

Title: IJV Partner Trustworthy Behaviour: The Role of Host Country Governance and Partner Selection Criteria

Author: Jean-Paul Roy (Queen’s School of Business)

Published: Journal of Management Studies (49:2 March 2012)

 
— Alan Morantz
 
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