A Theory of Joint Venture Life-Cycles.

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: [e-mail] (P. Roy Chowdhury). 0167-7187 / 01 / $ – see front matter © 2001 Elsevier Science B.V. All rights reserved. PII: S0167-7187( 99 )00014-4

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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

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