The Role of Knowhow Acquisition in the Formation and Duration of Joint Ventures

Abstract

We analyze the role of knowhow acquisition in the formation and duration of joint ventures. Two parties become partners in a joint venture to benefit from each other's knowhow. Joint operations provide each party with the opportunity to acquire part of its partner's knowhow. A party's increased knowhow provides the impetus for the dissolution of the joint venture. We characterize the conditions under which dissolution takes place, identify the party that buys out its partner, determine the time to dissolution, establish its comparative statics, and examine the implications of knowledge acquisition for the desirability of joint venture formation. We analyze the role of knowhow acquisition in the formation and duration of joint ventures. Two parties become partners in a joint venture to benefit from each other's knowhow. Joint operations provide each party with the opportunity to acquire part of its partner's knowhow. A party's increased knowhow provides the impetus for the dissolution of the joint venture. We characterize the conditions under which dissolution takes place, identify the party that buys out its partner, determine the time to dissolution, establish its comparative statics, and examine the implications of knowledge acquisition for the desirability of joint venture formation. (JEL code: G34) Dyer, Kale, and Singh (2004) report that, over the six-year period 1996-2001, American firms announced 57,000 alliances.1 Dyer et al. do not distinguish between equity joint ventures and other forms of alliances, but even a small proportion of joint ventures among the 57,000 alliances announced would amount to a large number such ventures.2 Of these, Bleeke and Ernst (1995) suggest that a majority will be dissolved. Our purpose in this paper is to understand the process of joint venture formation and dissolution, and to obtain an estimate of joint venture duration. We consider in particular the role of knowhow acquisition.The acquisition of knowhow appears to be a central aspect of joint ventures. McConnel and Nantell (1985, 2 An equity joint venture is a specific form of alliance that involves the creation of a new entity in which the two or more firms entering into the alliance hold equity stakes. Alliances, whether equity-or non-equity based, differ from mergers and acquisitions in that the firms involved retain their separate identities in the former case but not the latter. ventures. ''To acquire skills and technical knowhow'' is ranked first among ten different motives such as ''to acquire distribution facilities'' (ranked second), ''to acquire capital'' (ranked seventh), or ''to exploit a product or a licensed process'' (ranked tenth). More recently, Doz and Hamel (1998, p. 5) write that ''alliances may [...] be an avenue for learning and internalizing new skills, in particular those which are tacit, collective and embedded (and thus hard to obtain and internalize by other means).'' We examine the implications of knowhow acquisition for the formation and duration of joint ventures. Our conc...

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