Beyond entry mode choice: Explaining the conversion of joint ventures into wholly owned subsidiaries in the People's Republic of China

Abstract

While there is a vast amount of research on firms’ choice of ownership form when entering a foreign market, little attention has been paid to changes in ownership forms of operation abroad after initial entry. Using transaction cost economics and institutional theory we identify a number of factors that may help to explain the likelihood of foreign firms’ converting their joint venture with a local firm into a wholly owned subsidiary. We formulate a number of hypotheses and test them against data collected through a questionnaire survey of managers representing foreign subsidiaries in the People's Republic of China (PRC) that are run either as international joint ventures (IJVs) or as wholly owned foreign subsidiaries (WFOEs) that have recently been converted from IJVs into a WFOE. The paper contributes to research by showing that transaction-cost-based thinking is useful for explaining not only the initial choice of ownership mode when entering a new market, but also the potential subsequent changes of this ownership mode. By combining transaction cost theory with arguments from institutional theory, the study identifies a number of factors that contribute to explaining post-entry changes of foreign firms’ ownership forms in the PRC, and provides empirical evidence of this phenomenon. Journal of International Business Studies (2009) 40, 388–404. doi:10.1057/jibs.2008.56

Newly independent nations and large engineering projects: the case of the Volta River Project

“…Transaction costs broadly refer to the costs associated with doing business (Peng, 2014). Past studies have demonstrated that organisations are also more inclined to internalise activities that can be performed at lower cost whilst concurrently relying on the market for functional activities in which other organisations have a comparative advantage (Puck, Holtbrügge and Mohr, 2009;Klein, Frazier, and Roth, 1990). Such collaborations can pave the way for the parties to enjoy economies of scale, reduce cost and share risk (Hennart, 1988).…”

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“…Brouthers 2002;Brouthers and Hennart 2007;Hill, Hwang, and Kim 1990;Puck, Holtbrugge, and Mohr 2009) thus perpetuating a simplified view of the reality, in which smes typically enter foreign markets through exportbased modes. Such studies have taken into consideration the limits and constraints of smes going abroad, suggesting that such firms are less likely to pursue high-commitment forms of presence while preferring to approach foreign markets through direct or indirect exports (Gankema, Snuif, and Zwart 2000;Jansson and Sandberg 2008).…”

Ownership mode, cultural distance, and the extent of parent firms’ strategic control over subsidiaries in the PRC

“…With more than US$95 billion in inward FDI in 2009(UNCTAD, 2011, during the time of data sampling, the country was one of the largest recipients of FDI globally. Moreover, according to the statistics of MOFCOM (2010) wholly-owned subsidiaries (WoS) and international joint ventures (IJVs) are the dominant ownership modes in China (Puck, Holtbrügge, & Mohr, 2009). Therefore, we focus on these two types of ownership modes in our analysis.…”

“…4 IJVs represent contractual relations in which two or more parent firms share ownership and control rights over the combined resources to accomplish goals they cannot accomplish on their own. WoS, on the other hand, represent contracts that grant the parent firm ownership and associated residual claim rights over the foreign subsidiary's assets and profits (Puck et al, 2009). Yan and Gray (2001b: 303) referred to an IJV as Bincomplete contract in which the partners have to live with substantial uncertainties down the road.^These factors suggest that WoS and IJVs may suffer from different types of agency conflicts.…”