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The Governance Structure of International Joint Ventures
Property Rights and Transaction Cost Explanations

Sonja Horvath (Remetic)
Doctorate candidate
Center for Business Studies
University of Vienna
Brünner Str. 72
A-1210 Vienna, Austria
Sonja.Remetic@gmail.com

November, 2011

Abstract
This paper explores the determinants of ownership and residual decision rights in international joint ventures (IJVs) by developing a theoretical framework based on the property right and transaction cost theory. According to the transaction cost theory, environmental uncertainty (consisting of market, legal and political as well as cultural uncertainty) impacts the allocation of decision and ownership rights between the joint venture partners. Using the property rights theory we operationalize control by differentiating between residual decision and ownership rights (e.g. Grossmann, Hart 1986; Baker et al. 2008). The thesis of the paper is: The more important the JV-partner‘s intangible knowledge assets relative to the other partner for the generation of residual income and the higher the environmental uncertainty, the more residual decision and ownership rights should be assigned to her. Specifically, we focus on three environmental determinants under the transaction cost perspective: cultural distance, political and legal uncertainty and market uncertainty. Empirical results from joint ventures in the CEE provide some support of the hypotheses.

KEY Words:
Joint ventures, intangible knowledge assets, residual decision rights, ownership rights

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1. Problem
This paper explores the relationship between ownership and the allocation of residual decision rights in international joint ventures by applying the theoretical framework of property rights and transaction cost theories. The balance of ownership that leads to improved performance is likely to depend on the resources each partner contributes into the joint venture and the resources of the nation in which the venture is established. In other words, the criticality of the resources committed to a JV affords a parent some control independent of its equity share. In addition, equity ownership levels may actually be related to the bargaining power secured to partners by the resources they possess. The question of ownership and residual decision rights is extremely important for the organization, operation and performance of international joint ventures.

Neither the property rights theory, nor the transaction cost theory can explain this problem alone. The theoretical grounds of transaction cost theory view the allocation of decision rights as firm’s attempt to reduce the risk-associated transaction costs. By using the property rights theory we operationalize control by residual decision and ownership rights (e.g. Grossmann, Hart 1986; Baker et al. 2008). The thesis of the paper is: The more important the JV-partner‘s intangible knowledge assets relative to the other for the generation of residual income, the more residual decision rights should be assigned to her. We focus on three determinants of the transaction cost perspective: cultural distance, political and legal uncertainty and market uncertainty.

Globalization, increasing challenges in inter-firm competition and technology advancements require more flexible organization forms, which give rise to partnerships between firms (Webster 1992).

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It has become difficult to stay competitive without joining forces with other companies (Ohmae 1989, Webster 1992). Firms in a weaker position may leverage themselves against dominant players through alliances (Child & Faulkner, 1998). In last couple of decades, International Joint Ventures (IJVs) have become a favourite component of corporate strategy to support firm’s appetite for growth in international markets (Ding, 1997; Duan, 2007; Dunning, 1995; Li, 2003; Meschi & Riccio, 2008; Luo & Park, 2004). However, despite their popularity IJVs often experience...
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