A Theory of Joint Venture Life-Cycles.

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International Journal of Industrial Organization 19 (2001) 319–343 www.elsevier.com / locate / econbase

A theory of joint venture life-cycles
Indrani Roy Chowdhury a , Prabal Roy Chowdhury b , *
b a Jadavpur University, Jadavpur, India CSDILE, School of International Studies ( SIS), Jawaharlal Nehru University ( JNU), New Delhi, 110067, India

Received 1 May 1998; received in revised form 1 February 1999; accepted 1 May 1999

Abstract In this paper we provide a dynamic theory of joint venture life cycle that relies on synergy, organisational learning and moral hazard. We demonstrate that depending on parameter values the outcome may involve any one of the following: stable joint venture formation, joint venture formation followed by breakdown, or Cournot competition in all the periods. We also provide some interesting welfare results. © 2001 Elsevier Science B.V. All rights reserved. Keywords: Joint ventures; Learning; Synergy; Moral hazard JEL classification: F23; L13

1. Introduction Joint ventures represent one of the most fascinating developments in international business. They are of particular interest to less developed countries (LDCs), especially to those countries which are pursuing a policy of liberalisation. This is because these LDCs are trying to encourage foreign direct investment, and such investments often take the form of joint ventures.

* Corresponding author. E-mail address: prabalrc@hotmail.com (P. Roy Chowdhury). 0167-7187 / 01 / $ – see front matter © 2001 Elsevier Science B.V. All rights reserved. PII: S0167-7187( 99 )00014-4


I. Roy Chowdhury, P. Roy Chowdhury / Int. J. Ind. Organ. 19 (2001) 319 – 343

In the last two decades the rate of joint venture formation has accelerated dramatically.1 Recent studies suggest, however, that joint ventures are prone to frequent breakdowns.2 Kogut (1988), for example, found that out of the 92 joint ventures studied by him, about half had broken up by the sixth year. Even in India there there have been several well documented cases of joint venture breakdowns. These include those between Procter and Gamble (P& G) and Godrej, General Electric (GE) and Apar, Tata Sons and Unisys Corporation, to name only a few.3 There have been several studies that examine the question of joint venture formation at a theoretical level. These include, among others, Al-Saadon and Das (1996), D’Aspremont and Jacquemin (1988), Bardhan (1982), Chan and Hoy (1991), Chao and Yu (1996), Choi (1993), Combs (1993), Das (1997), Katz (1986), Marjit (1991), Purakayastha (1993), Roy Chowdhury (1995), Roy Chowdhury (1997), Singh and Bardhan (1991), Svejnar and Smith (1984) etc. The question of joint venture breakdown, however, has received relatively little theoretical attention. In particular there are very few studies that provide a unified treatment of both joint venture formation and breakdown. It is one of the goals of this paper to try and provide such a theory. We develop a theory of joint venture life cycle that relies on three basic building blocks, synergy, organisational learning and moral hazard. Synergy arises out of the complementary competencies of the two partner firms. In particular, in case of joint ventures involving a foreign multinational company (MNC from now on) and a domestic firm (especially from a less developed country) it appears that usually the MNC provides the superior technology, while the domestic firm provides a knowledge of local conditions etc.4 In the Indian context, in the alliance between Hewlett and Packard (HP) and HCL in computers, HP hoped for a quick access to the Indian market, while HCL hoped to utilise HP’s competence in business processes, production and quality maintenance. (See Business India, 1992.) In this paper synergy is formalised through the assumption that the MNC can supply capital relatively cheaply, while the domestic firm has cheaper access to labour. Organisational learning, whereby the partner firms in a joint venture...
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