Control of international joint ventures: an integrative perspective

Dora Chan
d.y.chan@shu.ac.uk
Sheffield Business School
Sheffield Hallam University

Abstract
Although control is central to the success of international joint ventures (IJVs),
theory development in the field has struggled to catch up with the rapid growth of
IJVs in practice. This paper has drawn on contingency theory and transaction
cost analysis to examine the control systems and processes used by four
business groups in China. The case findings have illustrated that parent control
of IJVs is multi-layered and multi-dimensional. A holistic "control package" a
parent firm applies comprises of five interdependent variables.

The iterative

interactions between these variables underlie the continuous evolution of the

control package.
Keywords: Control, international joint ventures, alliances, China, research
methodology.

1.0

Introduction

In response to the opportunities and challenges arising in both the traditional and
new markets in the new millennium, firms have shown an increasing willingness
to engage in different forms of interfirm co-operation (Chua & Mahama, 2007;
Langfield-Smith 2008, Ding et al., 2010 &, 2013), such as IJVs 1.

IJV is

considered as a viable means for sharing risk and costs, acquiring technology,
accessing to local knowledge and markets, creating synergy, and/or widening
relationship networks (Mjoen & Tallman, 1997; Inkpen & Beamish, 1997; Luo,
1997a; Griffith et al., 1998; Kumar & Seth, 1998; Groot & Merchant, 2000; Fey &
Beamish 2000; Demirbag & Mirza, 2000; Zhang & Li, 2001; Buckley, 2007;
Kamminga & Van der Meer-Kooistra, 2007).
While recognising the potential of IJVs, we also need to realise a firm that
agrees to participate in an IJV inevitably complicates its life (Geringer & Hebert,
1989:236). IJV formation brings together partners with diverse objectives and
institutional environments.

Shared ownership and control leads to on-going

interdependence, in which case each partner can be vulnerable to the others'

actions (Killing, 1983; Inkpen & Currall, 1998). IJV can be a mixed motive game
between partners who co-operate and compete at the same time (Yan & Gray,
1994; Zhang & Li, 2001). It often turns into a race about which party learns the
fastest and which is the dominant party (Inkpen & Beamish, 1997).
The environment in which an IJV operates, for this study China, can multiply the
complexity of parent control. Since China adopted the open-door policy in 1978,
the country has undergone rapid economic development. According to OCDE
(2013), China's real GDP growth on average was around 15% over the period
2005 to 2011. The environment in China is unique in the sense that despite the
significant economic growth, the Chinese government has continued exercising
prominent influence over different social and business affairs (Child & Tse, 2001;
1

A JV is considered to be international if at least one of the partners is headquartered outside the JVs country of
operation, or if the JV has a significant level of operation in more than one country (Geringer & Herbert, 1989:235).

Buckley 2007; Puck et al., 2009; Chang et al., 2013). The lack of effective rule of
law to protect assets, especially intangible assets, lack of transparency in policies
and systems, partner unreliability and/or unpredictable environment in China has
made JV management difficult (Chalos & OConnor, 2004).

The interesting

question is why, despite unsatisfactory performance in JV and other forms of

interfirm alliances repeatedly reported world-wide (such as Killing, 1983;
Beamish, 1985, 1988; Kogut, 1989; Gomes-Casseres, 1987; Groot & Merchant,
2000; Fey & Beamish, 2000; Chalos & O'Connor, 2004; Madhok, 2006; Chua &
Mahama, 2007), there have been so many firms getting involved in interfirm cooperation such as IJVs, especially IJVs in China.
Shenkar (1990) argued that firms use JV not because JV is easy to manage
successfully, but because it is the most suitable tool to serve their purposes. If
JV format of co-operation is chosen, the critical issue for individual partners is
how to manage the risks posed by the interfirm relationships and apply
appropriate controls to deploy strategies and achieve objectives (Killing, 1983;
Schaan, 1988; Geringer & Hebert, 1989; Yan & Gray, 1994; Glaister, 1995; Mjoen
& Tallman, 1997; Kumar & Seth, 1998; Groot & Merchant, 2000; Zhang & Li,
2001, Chalos & O'Connor, 2004). Control is the key to the success of IJVs and
other forms of interfirm alliances (Chua & Mahama, 2007; Dekker, 2004, 2008;
Langfield-Smith, 2008; Ding et al., 2013).
Interestingly, the majority of the existing IJV literature tends to focus on either JV
formation or outcome, whilst the inseparable process which underlies the
outcome only receives scant and unsystematic attention (Geringer & Hebert,
1989; Yan & Gray, 1994; Glaister, 1995; Griffith et al, 1998; Groot & Merchant,
2000; Zhang & Li, 2001; Madhok, 1995, 2006; Kamminga & Van der MeerKooistra, 2007). Although JV is among the oldest business forms in existence
(Demirbag & Mirza, 2000), the theoretical development of JV within the
accounting and control context has not kept pace with the practical development
(Glaister, 1995; Mjoen & Tallman, 1997; Groot & Merchant, 2000; Chalos and

OConnor 2004).

This paper aims to present empirical findings to assist

academics and practitioners alike in gaining a broader and deeper understanding

of parent control of equity2 based IJVs, especially those located in China.

The

key research question for this study is how parents control their IJVs in order to
fulfil their investment objectives.
This paper is structured in six sections. Section 1 outlines a two-stage theory
development approach adopted by this study.

Section 2 illustrates the

conceptualisation of IJV control. The choice of research method and case study
samples is discussed in Section 3.

Section 4 presents the summaries of four

case studies. Using the conceptualisation established in Section 2, the case

studies are analysed and compared. Section 5 discusses the major findings.
Finally, limitations of this paper and suggestions for future studies are highlighted
in Section 6.
1.1

Two-stage approach of theoretical development

This research has utilised a two-stage approach.

Stage 1 comprises of the

process of conceptualising IJV control. It involves idea gathering and learning

from prior theories and evidence. Checkland (1981) and Otley (1988) suggested
that each stage in the organisation theory development has the potential to teach
us something about the ways in which organisations evolve and adapt to the
environment over time. Given the fragmented stage of theory development of
the field, an integrative approach allows key concepts orientated from different
viewpoints to be mutually supportive and generates a broader picture on IJV
control (Geringer & Hebert, 1989; Parkhe, 1993; Mjoen & Tallman, 1997; Griffith
et al., 1998; Kumar & Seth, 1998).

Generally speaking, there are two forms of JVs, contractual JV (CJV) and equity JV (EJV). EJV formation requires the
creation of a separate legal entity that is distinct from its parents. There is no such legal requirement for CJVs. EJVs are
hierarchical (Inkpen & Beamish, 1997; Inkpen & Currall, 1998) and are widely considered to be more capable of
transmitting complex competencies and relationships needed for gaining competitive advantage through using JVs
(Martinsons & Tseng, 1995; Mjoen & Tallman, 1997). Control of equity-based IJVs is the focus of this research.

It needs to be stressed that the conceptualisation developed in Stage 1 is only of

a "skeletal" nature to guide the empirical investigation (Laughlin, 1995). It is the
empirics gathered at Stage 2 that informs and completes the skeletal framework.
The theory-empirics dialogistic exchange enables the initial conceptualisation to
be further developed into an integrative theoretical model of IJV control, which
highlights the unique environment in which control is implemented and from
which the model is derived.

This conceptualisation-empirics interplay forms

Stage 2 of the theoretical development process.

2.0

Conceptualisation of IJV control

Geringer and Hebert (1989) suggested that parental control in a complex IJV
context is multi-dimensional and comprises of three elements: (1) mechanism,
(2) extent (tightness) and (3) focus. The scholars observed that much of the prior
literature examined only one of the three control elements and presumed that IJV
performance is simply a direct outcome either of the mechanisms used, or of the
extent of control each parent adopted. These former studies failed to take into
account the relationships between the three control parameters and the impact of
other variables on IJV control and performance. As a result, they could only
provide us with some fragmented, non-comparable findings (Geringer & Hebert,
1989; Parkhe, 1993; Glaister, 1995).

Geringer and Hebert (1989:248) have

highlighted the potential of using an integrative approach to study IJV control,

and they made the following comments.
"The critical issue for a parent firm is to exercise control...in such a
manner that will enable it to successfully implement its strategy...
There is a strategy-structure "fit" when the benefits outweigh the
costs of control..."

The above observation has identified two theoretical lenses which are potentially
able to provide a broader picture of IJV control. They are contingency theory on
which the "strategy-structure-control fit" is based, and transaction cost economics
which underlines the cost-and-benefit analysis. The complementary nature of the
5

two theories can be explained by the fact that a firm's investment decision is
often a trade-off between control and risk (Anderson & Gatignon, 1986; Geringer
& Hebert, 1989). Forming JVs involves lower resource commitment and hence
risk, but often at the expense of sharing return, resources and control.
Successful firms skilfully trade with the levels of control and return they need for
the reduction of resource commitment and risk (Anderson & Gatignon, 1986).
"IJV offers a compromise ownership strategy" (Buckley, 2007:113).
Using Geringer & Hebert's findings as the base, the journey to develop the
conceptualised framework has included a review of existing literature on
contingency theory, JV and interfirm co-operation with a constant reference to the
cost-and-benefit assumptions. Social and relational issues are also taken into
consideration as these soft factors underlie the fabric of any form of interfirm cooperation.

In order to help readers to follow this complex developmental

process, the conceptualised model developed from Stage 1 is introduced first, as

Figure 1 shows. The process through which the conceptualisation is built will
then be discussed.
Insert Figure 1 here.
2.1

Contingency theory

This research recognises that contingency theory can contribute to the theory
development of control practices within the contemporary settings (LangfieldSmith, 1997; Chenhall, 2003), such as IJV (Geringer & Hebert, 1989; Kumar &
Seth, 1998; Groot & Merchant, 2000). Contingency theory assumes that there is
no one best control system for all organisations in all situations, and an
appropriate design is contingent on various internal and contextual factors, such
as strategy (e.g.: Chandler, 1962; Govindarajan & Gupta, 1985; Franko, 1987;
Govindarajan, 1988, Simons, 1987; Govindarajan & Fisher, 1990), structure (e.g.:
Burns & Waterhouse, 1975; Mintzberg, 1983; Govindarajan, 1986) and

environment or technology (e.g.: Galbraith, 1973; Gordon & Miller, 1976; Otley,
1980; Govindarajan, 1984).
In their study of management control patterns in JVs, Kamminga and Van de
Meer-Kooistra (2007) argued that a more in-depth understanding can be
obtained through examining the relationships between control (in terms of control
mechanisms, tightness and focus), the JV characteristics and the environmental
context in which the JV operates. Management control systems do not operate
in isolation, a concept which was also highlighted in a few other studies (Otley,
1999; Chenhall, 2003; Chua & Mahama, 2007; Malmi & Brown, 2008; Sandelin,
2008; Langfield-Smith, 2008).
For this study, control is not treated as an independent variable, but is seen as a
part of a package (Otley, 1999; Malmi & Brown, 2008; Sandelin, 2008; LangfieldSmith, 2008) which includes two other interdependent variables, strategy and
structure.

An IJV control package has a two-way relationship with the

environment within which it operates (Miles & Snow, 1978; Govindarajan &
Gupta, 1985; Emmanuel et al., 1990).
2.1.1 Strategy - IJV strategic mission
Some former studies; such as Govindarajan and Gupta (1985), Govindarajan
(1986, 1988) and Simons (1987); have successfully extended the contingency
logic from corporate/interfirm to subsidiary/intrafirm contexts. These researchers
rightly challenged the view that strategy formulation and implementation takes
place not only at corporate level, but also in business units comprising a firm.
Often, subsidiaries within the same organisation pursue different strategies, and
they in turn require different structures and control systems.

IJVs can be

subsidiaries of multinational firms through their choice of investment modes. The

strategic mission driving the formation of an IJV enacts a specific environment
that the IJV and the partners need to deal with. It seems logical to assume that

the contingency assumptions which posit a relationship between strategy and

control are applicable to IJV.
Building on Govindarajan, Gupta and Simons' interpretation of strategy at the
subsidiary level, this research will adopt "IJV strategic mission", the objectives
given to an IJV by the parents, as one of the contingency variables that underpin
the conceptualisation of IJV control (refer to Figure 1).
2.1.2 Structure - bargaining power composition among partners
Facing the self-enacted conditions created by the strategy, an IJV needs to be
structured in such a way that can facilitate the achievement of the strategic
mission.

Structure should follow strategy, as Chandler (1962) advocated.

Langfield-Smith (2008) argued that the structure through which controls are
implemented in strategic alliances can help to reduce risk and the possibility of
failure.

Dekker (2004) also suggested that the structure chosen to govern

interfirm co-operation is often critical to its success.

Many prior structural contingency studies 3 interpreted structure as the degree of
decentralisation or interdependence. This definition however, does not seem to
fully capture the structural characteristics of JV type of operations. It is because
multiple-ownership inevitably affects the JV structure in terms of how equity stake
is shared, decisions are made, information flows and is shared and tasks are
divided. The level of risk facing, and control gained by, individual partners in
interfirm co-operation is likely to be influenced by the choice of partner(s)
(Dekker, 2008, 2013; Ding et al., 2013) and the resulting bargaining power
composition among the participating interests.
According to Yan and Gray (1994), Harrigan and Newman (1990), and Inkpen
and Beamish (1997), the relative bargaining power structure is decided by the
amount of key resources that each partner brings to the IJV. Partner selection
3

The nature of their samples, whether they were wholly or jointly owned, was not distinguished.

determines an IJV's mix of resources and relationship networks (Luo, 1977a;

Wong & Ellis, 2001; Chua & Mahama, 2007). There are other studies (such as
Parkhe, 1993a; Luo, 1997; Wong & Ellis, 2002) which illustrate that compatible
nationality and/or cultural traits among partners can effectively promote robust
co-operation and lead to higher stability.

Similarly, Madhok (1995, 2006)

illustrated how trust between various IJV parties can add value to the exchange
and influences eventual performance. According to Schaan (1988), compatible
business objectives and philosophies between partners can have a major impact
on IJV performance. "Effective alliance management begins with selecting the
right partner, as this precedes the design of contracts and management control
structures" (Ding et al., 2013:142). How to choose and who to choose as IJV
partner(s) are all parts of a control package. This study has taken on board the
above suggestions and adopted "bargaining-power composition among partners"
as a structural variable for the conceptualised of IJV control (see Figure 1).
2.1.3 Control - mechanisms, extent and focus dimensions
Control within a JV context is particularly complex due to the needs to share
ownership, information, resources and profits, the so called shared control
issues (Kamminga & Van der Meer-Kooistra, 2007:131). Geringer and Hebert
(1989) observed that control in JV context is multi-dimensional and involves the
use of control mechanisms, control extent and control focus.

These three

dimensions are interdependent. Chalos and OConnor (2004) and Kamminga

and Van der Meer-Kooistra (2007) also suggested that an integrative concept of
JV control can be obtained through examining all of the three control dimensions.
2.1.3.1

The mechanism dimension of control

Much of the early IJV literature reveals that foreign partners often rely on majority
equity and then voting right as an effective mechanism to exercise significant
control over their IJVs (Stopford & Wells, 1972; Killing, 1983; Beamish, 1985,
1988; Blodgett, 1991).

In contrast to the equity-related view, some studies

challenge the notion that control is not an automatic result of ownership. For

example, minority partners may exercise disproportionate control if they bring to

the IJVs strategic important resources (Lecraw, 1984; Schaan, 1983, 1988;
Harrigan & Newman, 1990; Yan & Gray, 1994; Glaister, 1995; Mjoen & Tallman,
1997; Kumar & Seth, 1998). Partners may exercise control over the IJV through
applying cultural, behavioural and/or outcome control mechanisms that are not
equity related (Chalos & OConnor, 2004). The conflicting results between the
two schools of thought indeed demonstrate the breadth of control mechanisms
available to parent firms.
According to Schaan (1983), control mechanisms are used to serve either
positive or negative purposes. A partner tends to apply positive control tools in
order to influence certain IJV decisions that are consistent to its interests. The
appointment of key JV personnel is a typical example of positive control. On the
other hand, partners may use negative control mechanisms to prevent
undesirable activities from happening in the IJVs. Veto right is an archetype of
the negative category.
orientations/types

of

The insights gained on the positive and negative

control

mechanisms

are

incorporated

into

the

conceptualisation of IJV control (see Figure 1).

2.1.3.2

Control - the extent dimension

The majority of previous studies of control extent examine the degree of

influence each partner exerts into different types of IJV decisions. A notable
study by Killing (1983) investigated the jointness in decision making between JV
partners. According to the precise ways in which nine identified JV decisions
were made, Killing classified his samples into three categories, dominant
partners JVs4, shared management JVs5, and independent JVs6. Results of the
study showed that 35% of the samples were dominant partner JVs 7, 54% were
4
5

Only one partner played a key role in decision making and the JV was managed almost like a wholly owned subsidiary.
Both partners of a JV played an active, equal and meaningful management role in decision making.

Neither of the two partners played a strong role and the JV managers were given extensive autonomy in decision
making.
7
The majority of dominant parent JV samples were engaged in high risk, high capitalisation projects; such as land
development and construction business, as well as oil and gas exploration.

10

shared management JVs8, while 11% were independent JVs.

Dominant parent

JVs were found consistently outperforming shared management samples 9. The

overall results led Killing to conclude that partner firms should use dominant
control whenever possible.

This view was consistent with the scholar's

assumption of multiple parenting as a key source of JV problems. Dominant

control, in which case an IJV is managed mainly by one parent, could
substantially reduce the required level of co-ordination between partners and cut
out the complex decision making process and potential conflicts.
Contrasting the dominant control superiority view, Beamish (1985, 1988) found a
correlation between unsatisfactory JV performance and dominating foreign
control in JVs located in developing countries. A positive association was
identified between performance and foreign partners using local managers
and/or partners for advice on local matters. These findings have illustrated the
importance of strategy-control fit, since accessing local knowledge and contacts
is common investment motive driving many foreign partners to invest in
developing countries.
Glaisters (1995) findings were similar to Beamishs, but from UK IJVs.

For

instance, out of 94 IJVs, 56% of the samples were shared management IJVs 10.
Dominant partner or truly independent JVs were found only in 5% of cases. 38%
of the samples were using hybrid control. Glaister's definition of hybrid control is
indeed similar to the split control suggested by Schaan (1988), Geringer &
Hebert (1989) and Yan & Gray (1995). Under a split control arrangement, each
partner plays a distinctive, but complementary, role in IJV management. The
distribution of responsibilities tends to be based on competence and relevant
interests of different parties.
8

Shared management JVs were commonly found in manufacturing situations in which one of the two parents was
supplying technology and the other was contributing local knowledge.
9

Independent JVs were also found to exhibit superior performance. Killing believed that the high level of freedom given
to the independent JVs was the result rather than the cause of their performance. Owing to a small sample size (4%), a
small coverage was devoted to the independent typology as compared to the other two types of JV samples.
10
All of the decisions were taken by either both partners together or by both partners acting with the JV management. In
the majority of cases their planning and control systems were derived from both partners.

11

The extent of control, in the forms of dominant, shared, independent or split,

reflects the ways in which responsibility is distributed and decisions are made in
the IJVs, and it is a part of IJV control package. This understanding is integrated
into the conceptualisation, as Figure 1 illustrates.
2.1.3.3

Control - the focus dimension

As discussed above, prior research often assume control extent as being

dependent upon the focus of decision making. However, this interpretation has
been criticised as providing an incomplete view on IJV control (Geringer &
Hebert, 1989). One of the key arguments is that decision making is not the only
control mechanism available to parent firms. Another criticism is that the extent
of control each parent holds is measured quantitatively by the number of decision
aspects that they are in charge. The higher the number of aspects, the higher
the control.

This set of linear assumptions may prove to be over-simplistic.

Exercising control in interfirm co-operation does not come free.

Fighting for

control over aspects that are not strategically important to a partner can lead to
financial and emotional costs to the partnership.
There is empirical evidence illustrating parent firms' selective usage of resources
through controlling strategically important JV activities and decisions (Lecraw,
1984; Schaan, 1983, 1988; Newman, 1992; Glaister, 1995; Mjoen & Tallman,
1997; Groot & Merchant, 2000; Chalos & OConnor, 2004).

Indeed, parent

control in IJVs tends to have a focus. They may choose to control over as broad
or as narrow a scope as they need (Geringer & Hebert, 1989). This notion of
control focus is incorporated into the conceptualisation, and the three
dimensions, mechanism, extent and focus, are integrated to make up the control
variable of the model (see Figure 1).
2.1.4 Control and IJV performance

12

Schaan (1983, 1988), Lecraw (1984), Geringer & Hebert (1989) and Mjoen and
Tallman's (1997) studies illustrated that control does not stand in isolation, and
indeed is a means that may lead to the desired ends. As Otley (1980:423-4)
suggested, "objectives are an essential part of a contingency framework not only
because they are themselves one contingent variable... but also, and more
importantly, because they form the criterion against which the effects of different
configurations of controls must be evaluated". This research has included the
means-end relationship in the conceptualisation to reflect a holistic view on the
use and usefulness of control (Chenhall, 2003) in a wider IJV context (as Figure
1 demonstrates).

The conceptualisation has assumed that there is a

relationship, but not a simple, linear correlation (Otley, 1999; Norreklit, 2000;
Chenhall, 2003), between control and eventual performance. Having added the
means-end link to the framework, the conceptualisation process is completed.
2.1.5 Summary of the strategy-structure-control fit conceptualised model
The insights gained from the literature review have developed and completed the
conceptualisation, as Figure 1 presents. It has posited that IJV strategic mission,
partnership

bargaining

power

structure,

the

three

control

dimensions;

mechanisms, extent and focus; and eventual performance form a holistic "control
package" that parent firms may apply to their IJVs in order to fulfil their
investment objectives. This conceptualisation will be used in Stage 2 of the
theory development process to guide the empirical investigation and analysis.
3.0

Case study method

An understanding of accounting and control phenomena is difficult to obtain in

isolation from the context in which the organisations are embedded, and
therefore a more contextual investigation method is required (Dent, 1991; Otley &
Berry, 1994; Scapens & Bromwich, 2001). Moreover, investigating control in the

13

natural settings in where it operates can enhance the ecological validity 11

(Scapens, 1990; Gill & Johnson, 2002).
Eisenhardt (1989) suggested that one of the strengths of building theory from
case studies is that a constant comparison of conflicting realities can lead
researchers to reframe their perceptions and unfreeze their thinking. This kind of
stimulating process has the potential to generate theory with less research bias.
It is especially valuable where existing theories are inadequate or incomplete, or
explain only a sub-set of the phenomena of interest (Otley & Berry, 1994:47),
like the current stage of theoretical development of IJV control. These benefits,
together with the set of methodological underpinnings, have driven this research
to adopt a case study method.
3.1 Gaining access and case study sample selection
Target samples for the empirical investigation are firms which already have IJVs
established in China.

Given the sensitivity of the area of inquiry (Groot &

Merchant, 2000; Wong & Ellis, 2002), and the geographical dispersion between
IJVs and their parents, gaining access became a key obstacle. Through various
channels, initial contacts with some potential sample firms were made either
through personal links or referrals made by various institutions on behalf of the
researcher. Some of these contacts subsequently led to personal interviews with
their executives. Information collection from the primary and various secondary 12
sources was conducted from the end of 1995 through to 1998.
Owing to the time and resource constraints of a one-person research team, a
practical decision was made on the number of cases to focus on. Information
was collected from four business groups, in disguise they are referred to as
Superior, Marlee, Silky and Pearl. In addition to the criterion of the degree of
11

It is concerned with the extent to which it is possible to generalise from the social context in which the research has
taken place and data are gathered, to other contexts and settings. This is also related to the issue of how artificial the
research setting is relative to natural context typical of normal, everyday life (Scapens, 1990; Gill & Johnson, 2002).
12
Such as annual reports, newspaper articles, Internet homepages, autobiographies and personal knowledge were used
to complement the primary information collected through personal interviews. The secondary information also worked as
a mechanism to reduce bias in the interpretation of empirical details.

14

completeness of the data, the four parent firms were chosen based on their
contrasting backgrounds (see Table 1). Indeed, the four cases add value to one
another. Case study summaries are presented in Section 4.
3.1.1 Structure of the personal interviews
A semi-structured interview method was chosen. All interviews involved senior
executives from the four sample firms (see Table 1). In three out of four cases,
multiple informants were interviewed. Details obtained from different executives
from the same company reveals a wider picture about their strategies and
operations. The interview duration varied and ranged from one-and-a-half hours
to a full day in the case of a visit to Pearl's video production plant. In the Silky
case, only the Chairman was interviewed as he had a full grasp of the control
systems and processes being used. The meeting was held in the Chairman's
home on a Sunday, and it lasted for almost the whole afternoon. The informal
environment encouraged open conversation, and it also allowed the researcher
to observe the interviewee's behaviour outside the office 13.
The majority of the interviews were recorded.

The freedom enabled the

researcher to concentrate on the conversation and at the same time observe the
empirical scene. The observational information was useful in the process of
understanding and interpreting the empirics (Dent, 1991).

It also worked as a

triangulation mechanism to improve the validity of the empirical details.

Insert Table 1 here.
4.0 Case study summaries
Summaries of the four in-depth case studies are provided below.
4.1

Marlee Group

13

During the meeting, there was regular telephone contact between the Chairman and one of the Chinese factories in
relation to an important order that needed to be completed by the end of the day.

15

Marlee is a large European group that produces and sells personal hygiene
products and food. It went into China with an ultimate aim of maintaining their
world-wide competitiveness through penetrating the domestic market with local
production.

Up until 1996, the Group had set up eleven production-based

subsidiaries and a holding company, which worked as the Greater China 14

regional control centre, in China. Out of the eleven production operations, nine
were JVs and two were wholly owned.
There were two sets of motives driving Marlee in favour of using JV. When the
group started to invest in China in the early 1980s, wholly foreign owned
investment was a new, and somewhat risky, idea to the investors as well as the
Chinese government. The overall situation led the Group to form the first three
subsidiaries via a 50:50 JV route with local Chinese partners. The Group's later
FDI was also mainly in JV format, each with a majority equity stake ranging
between 60% and 95%. The key motive for using JV was that Marlee felt that
having a Chinese partner could bring them substantial benefits.

Sino-foreign

JVs are entitled to sell in the domestic market, and it fulfilled Marlee's objectives.
Secondly, Marlee's partners were often major local players who had the contacts
and distribution infrastructure that were vital to run business in China. Partnering
with them would give Marlee a quick and strong start in the competitive
environment.

Moreover, some of these Chinese partners possessed local

leading brands that Marlee wanted to include in its product portfolio.

Obtaining the majority equity share, and hence majority control, was Marlee's
preferred IJV model. The majority control right enabled the Group to run all its
Chinese subsidiaries, wholly or jointly owned, as one cohesive business. The
Greater China region was given substantial growth targets to fulfil by the turn of
the 21st century. To achieve these goals, a lot of co-ordination was required
between all Chinese subsidiaries. The Group needed to secure effective control

14

It includes Mainland China, Hong Kong and Macau.

16

over critical functions of the IJVs, such as finance, personnel and marketing. It
would be easier to do so if Marlee had the majority shares in these operations.
The Financial Controller stated that "not everything is easy, and in some JVs we
do have problems... They (the Chinese partners) can veto your appointments.
They can prevent existing people from leaving to support other (Marlee) JVs...".
According to the Distribution Manager, various IJV parties had spent a lot of time
on negotiation and reconciliation. The Financial Controller added that "you have
to sort them out. If you cannot, then Marlee will take another way forward, and it
might mean forming a new JV". So far, none of the IJVs have ended up in
divorce. The partners managed to compromise and move forward. Based on
the rapid growth achieved by the Chinese operations in recent years, the region
was likely to fulfil the substantial growth targets given by the Marlee Head Office.
Within fourteen months of the interviews taking place, Marlee formed two more
IJVs in China. The strategic importance of, and Marlee's commitment to, China
could be clearly seen.
4.2

Superior Group

Superior Group is a European chemicals producer.

In 1990, Superior (60%

equity) formed a paints trading IJV in Hong Kong, which is known as SGP HK,
with an European conglomerate, Giant (40% share). SGP HK has been working
as a control centre for the two UK parents' future investments in the Mainland
China. In 1994, SGP China was established between Superior (45%), Giant
(45%) and a local Chinese partner, IDC (10%). Improving their competitiveness
through penetrating the Chinese market with local production was a key reason
driving Superior to China. The nature of their products requires production close
to the final markets in order to add value. The Group has had a long business
history and substantial investments in the Asia Pacific Rim. Putting production
capacity in China would complete this network, and this was another reason for
going into China.

17

For Superior, Giant was a compatible partner in terms of business scope, size,
culture and investment objectives. Giant had a greater experience of production
and distribution in China, and this could provide Superior with valuable guidance
at the initial stage. Superior would bring to the IJVs their world-wide brands and
advanced technology that Giant had got no access to. By pooling resources
together, the two parties could make a faster and bigger move into China.
Despite Giant owning a significant amount of equity in each of the two JVs, these
operations were generally under Superior's control.

Giant appointed the

Chairman for SGP HK who acted as a symbolic figure-head. Control rested in

the hands of the Managing Director, an Superior expatriate, who also acted as
the Chairman for SGP China.

The two IJVs' strategies, policies and systems

were fully integrated into Superior's Asia Pacific regional operations. SGP China
produced, and SGP HK sold, only Superior's branded products. According to the
Managing Director, "Giant has conceded to Superior that Superior knows most of
the chemicals business. The key management is appointed by Superior and that
is perfectly acceptable to Giant. ...There is a very good convergence between the
two companies in terms of what their objectives have been and this really means
a long-term profitable penetration into the Chinese market".
The Chinese partner, IDC, was one of the government agencies managing the
area in where SGP China is located.

Locking the authority into an equity

relationship could encourage them to act in the IJV's interests. Moreover, IDC
had valuable contacts with important parties that would be very useful to the IJV.
Because of that, IDC was then involved in handling local bureaucratic procedures
and public relations for the operation.
SGP HK and China either met or exceeded the aspirations set by the partners.
In the interviews, it was revealed that a new JV, SGP Shanghai, between Giant
and Superior would start production in 1998/9. Indeed, by that time other worldclass players had gradually entered into China.

Competitive pressure urged

Superior to move quickly into other major cities. Besides the Shanghai venture,

18

serious talk between Superior and Giant about creating other production plants in
China was underway15. When expressing their views on future investment in
China, all of the three interviewees were very positive. According to the Finance
Director, "...from a long-term point of view I believe that the opportunity is there
and the future of China should be very positive and prosperous".
4.3

Silky Garment

Silky, a small-sized silk garment manufacturer, was founded in Hong Kong 16 by

Mr. Li in the late 1970s. The business grew steadily and by the mid-1980s sales
offices were set up in its main export markets, USA and Canada. As with many
businesses in the 1980s, Silky was facing a sharp increase in operational costs
in Hong Kong.

China could offer what Hong Kong producers desperately

needed, such as cheap land and labour at a convenient distance, in order to

remain competitive. Silky's direct investment in China began from 1986. In less
than a decade, its complete production base had moved to China. The Hong
Kong business became the Head Office.
Silky established four production subsidiaries in China under different formats
ranging from wholly owned, JV, to process compensation trade agreement
(PCTA17). Each investment mode decision was made according to a specific set
of conditions at the time. For instance, when Silky decided to set up a dyeing
15

IDC was not involved in either the Shanghai JV or other new proposals. They however knew all along that the two
foreign counterparts would put further investments in China. Moreover, the new Shanghai plant is located far away from
SGP China in the South. There were no issues between the Chinese and foreign partners.
16

Silky and Pearl, the Hong Kong partner features in the next case study, can be regarded as pseudo foreign investors in
China. This research has overlapped the pre- and post-periods of the return of Hong Kong's sovereignty to China in July
1997. It was realised that the transfer of sovereignty could influence the decisions of what should be classified as
foreign investment in China. Therefore, a clear rule had been set down before the research began that Hong Kong
investment would be categorised as "foreign". This decision was also based on the grounds that it was the way in which
the majority of official surveys that this research uses were conducted. Up until now, investments from Hong Kong and
Macau remain to be classified as "foreign" by the Ministry of Foreign Trade and Economic Co-operation, China (checked
www.moftec.gov.cn on 17th December 2003).
17

Under a PCTA, the Chinese partner usually provides building and labour, whilst the foreign partner brings in machinery,
materials, technology and/or orders, to start-up the business. The foreign partner's total investment will be compensated
by a fixed periodical payment from the Chinese counterpart regardless of the PCTA's business performance. Not until the
full amount is paid up, the foreign partner remains the legal owner of the assets. To describe this new form in a simpler
way, the foreign partner basically acts as a lender of capital and in return they will have a reliable production base which
will always put their orders first. Not until these orders are finished can the factory produce other customers products.
The foreign investor has a great extent of control over production and return on investment. On the other hand, the
Chinese partner enjoys the low interest or interest-free capital and constant order supply from the foreign counterpart.
This new form can be considered as contractual joint venture in the sense that there is no requirement to establish a
separate legal entity and a PCTA will dissolve after the predetermined payback time.

19

factory in China, it would have been very difficult to get a license to start business
if the venture was not in a JV format with a local partner. PCTA was chosen for
two sewing subsidiaries at the time when Silky was relatively short of investment
funds. Regular repayments and a fixed life span of the PCTA model gave Silky
the required stability.
Silky tended to choose parties whom Mr. Li knew personally or whom Silky had
worked with as JV and PCTA partners. Previous knowledge helped to ascertain
the extent of resource compatibility and trustworthiness of the potential partners.
In addition to picking the right partners, setting a shorter payback period for each
investment was another method Silky used to minimise the risk of investing in
China.

Moreover, owing to the differences in business experience and

background between partners, Mr Li preferred to have formal conflict resolution

provisions18 in place in order to safeguard his interests.
Although holding a relative minority equity stake (44%), Silky has been exercising
dominant control in the dyeing JV. The situation initially suggested that the
significant control Silky held was equity irrelevant. It then came to light that Silky
was using an "internal exclusive agreement (IEA)" to secure outright control 19 of
the IJV. Under the IEA, Silky paid the Chinese partner its share of the forecasted
profits periodically. The Chinese counterpart acted somewhat like a "cumulative
preference shareholder". While it owned parts of the business and was entitled
to a fixed return, they had surrounded the rights of JV control and further profit
sharing. Since the IEA was adopted, the Chinese partner continued working for
the JV on local administrative duties.

However, Silky was the boss.

Two

expatriates were put in charge of the day-to-day operation of the JV. The Head
Office held control of all other higher-level decisions. Under the IEA, the dyeing
18

Formal conflict resolution provisions were set up by stipulating as many foreseeable problems and problem resolving
procedures as possible in the JV contracts. Should unfavourable incidences occur, there were formal written agreements
directing actions from various parties (see Davidson 1987 for further details).
19

The JV had a slow start and made a financial loss in the first year of trading. The Chinese partner soon started to lose
confidence and suggested that the dyeing factory could be converted into an exclusive sub-contracting production base to
secure a stable annual income. Silky agreed with the proposal. The local partner started to look for clients and checked
out the market value of the JV's production capacity. After the market price was identified, Mr. Li initiated that Silky would
take up the exclusive right.

20

business gradually took off. This good experience led Silky to invest in another
dyeing factory, which would be in a wholly owned format.
Mr. Li concluded that "I only have a few factories and so far each factory is doing
well and making profit... I always feel that China is the biggest market in the
world... Actually, I have already planned to explore the domestic market...in
China next year".
4.4

Pearl Electronics Group

Pearl, an audio and video systems producer, was founded in Hong Kong in 1984.
This small company went through rapid expansion and in 1991 Pearl went
public20. The two founders remained in full control of the business and acted as
the Chairman and Vice-Chairman 21 respectively.

By the mid-1990s, Pearl

relocated its entire production base to mainland China and the Hong Kong office
turned into the headquarters.

Their Chinese production base was swiftly

expanded into eleven production subsidiaries (two JVs and nine wholly owned).
The motives which drove Pearl to China were very similar to Silky's.

Pearl

needed to produce in China in order to remain price competitive in its export

markets (Europe and America). In the first decade of business, Pearl adopted a
low-risk, rapid growth strategy. They leased buildings in Southern China to do
mass-production of low-cost audio and video products mainly for export purpose.
Because of that, there were no major benefits of having partners and a JV status.
It explains why the majority of Pearl's subsidiaries were wholly owned. Their two
latest investments were different in terms of objectives and format.
The latest JV was formed with a leading Japanese electronics group, Dion (51%
equity), in 1994.

The rising costs and competition in Japan forced Dion to

20

At the same time, Pearl also changed its registered address to Bermuda. However, it was stated in Pearl's annual
reports that the Group's head office and principal place of business remains in Hong Kong.
21
Throughout the empirical investigation, I detected that a highly centralised control has been adopted in Pearl. An
authoritarian management style has been commonly used from the Chairman to functional head levels. There is plenty of
evidence embedded in the case study to illustrate the authoritarian culture.

21

consider moving some production to China and penetrate the Chinese market.
However, they needed an experienced companion to guide them through the first
investment and Pearl stood out as a suitable candidate. Pearl was keen on
accessing to Dion's advanced technology and automotive market.

These

objectives led Pearl to accept a supporting role in the JV management.

Pearl's JV with NS (45% equity), a Chinese electronics producer, was formed in
1993 for a different set of motives. Having been a market follower for almost a
decade, Pearl felt that they had the experience and capabilities to take on a
leading role in the market. The Group began to work on the domestic market
and planned to go up north of China before their key competitors did. Based on
TianJin's22 long industrial history, the Board believed that it was the place to start
the Pearl's future investment in Northern China. NS, like many other Chinese
state-owned enterprises, desperately needed an injection of funds to revive its
business.
established.

They were very keen on Pearl's idea and the JV was swiftly
NS's reliance on their inputs 23 gave Pearl a strong bargaining

position in the partnership and JV management.

Pearl sent two expatriates from Hong Kong to run the TianJin JV. Ming 24 was the
JV General Manager (GM) and the other expatriate was his deputy. Within the
guidelines given by the Head Office, the GM possessed a large extent of
operational autonomy to run the JV. Before the local market was established and
its own sales capacity was built up, the TianJin JV's sales were then handled by
Pearl in Hong Kong. All subsidiaries were required to provide the Head Office
with daily production reports, as the Vice-Chairman and the Sales Office wanted
to know the progress of their orders. If the reports showed any signs of
abnormality, direct interference from the Vice-Chairman was expected. Besides
22
23

A large city located in the Northeast of China.

In terms of capital, technology, export opportunities and international experience .

24

Ming was one of the three interviewees from Pearl. Ming is a serious person. In the interview, he was willing to
answer only those questions related to the TianJin operation. Information about the Dion JV was collected from the other
two interviewees who had some knowledge of the Japanese partner and the JV. From Ming's reaction and the rivalry
relationships between the managers from the video and the audio divisions, it could be sensed that a strong territorial
culture existed in the company.

22

production, finance and accounts was another function that was centrally
controlled by the Head Office.
In the first two years of operation, the TianJin JV suffered from financial losses.
According to the GM, the unsatisfactory financial results were not due to bad JV
management, but caused by the bottleneck geographical location of, and the
inadequate industrial infrastructure25 in, TianJin to support small investments. In
terms of partner co-operation, there were no major issues. However, tension
gradually built up in the relationship owing to the fact that NS had run out of
funds to afford further losses or capital injection into the JV. The disappointing
results undermined the GMs, but not the Group's confidence, although the Head
Office had further tightened its control over the spending and the overall
decisions of the TianJin JV.

Pearl was actively seeking suitable JV partners to

assist them to further explore the opportunities in China.

Summaries of the four case studies have been presented above. The case
details are now analysed in Section 5.
5.0

Case study analysis and key findings

The conceptualised model developed in Section 2 (see Figure 1) is now used to

explain and compare the control packages adopted by the four sample partners
in their IJVs located in China. As was discussed before, the conceptualisation is
only of skeletal nature. It is the empirics that informs and complete the skeletal.
Owing to the space limit, this paper cannot include graphical illustration for each
of the modifications made to the conceptualisation in light of new understanding
gained from different stages of the analytical process. Instead, the integrative
model developed from the process is firstly introduced in Figure 2. The case
study analysis and the key findings are then presented.
Insert Figure 2 here.
25

They had difficulties finding suitable suppliers for materials and sub-contraction services. The situation forced the JV to
source mainly from Southern China and Hong Kong. It in turn inflated the production cost and lead time.

23

5.1

IJV strategic mission

Insert Table 2 here.

Table 2 summarises the four sample business groups' investment motives in
China.

In general, Marlee and Superior were driven to invest in China by

marketing motives. Silky and Pearl were initially driven by low production cost
and in the later stages by a combination of marketing and cost rationale. Despite
the differences in backgrounds (see Table 1) and motives (see Table 2), the four
sample firms considered IJV as the best option which could provide them with
the highest net benefits (Beamish & Banks, 1987; Shan, 1991).
The majority of the four samples' JVs were hybrid JVs, in the sense that they
have combined equity with other contractual arrangements, such as licensing,
product buy back and material supply. This mixed model was used to maximise
income and control while minimising the risk of going into China and/or using JV.
Some previous studies also found hybrid JV adopted by multinationals in other
parts of the world (Contractor, 1985; Beamish, 1985; Beamish & Banks, 1987).
5.2

Bargaining power composition among partners

As was discussed in the conceptualisation process, partner selection plays a key

role in a holistic control package. Driven by their respective strategic missions,
the four samples used different criteria to choose their JV partners.

For

example, Silky and Superior preferred to choose partners they knew. Previous
acquaintance provided various parties with understanding and relationship
attachments to do business together (Parhke, 1993a; Inkpen & Beamish, 1997;
Inkpen & Currall, 1998; Luo, 2002; Wong & Ellis, 2002). This result is consistent
with Dekker's (2004; 2008) viewpoint that prior ties can be used as a form of
social control to mitigate control problems posed by interfirm collaboration. In
contrast to Silky's and Superior's approach, Marlee tended to go for the size of,

24

and resources and networks owned by, the partners that could help them to
speed up the local adaptation process.
Despite the differences in approaches, a common criterion the four sample firms
used was to choose partners who possess compatible resources, which include
location-specific knowledge. Partners' local knowledge can bridge the psychic
distance (Hood & Young 1979; Kogut & Singh, 1988) which has been considered
as a key barrier of FDI in unfamiliar markets (Caves, 1982; Thomsen, 1992) and
a determinant of ownership strategy in FDI (Buckley, 2007). However, we need
to realise that not only local, but also foreign firms, can hold local knowledge.
Giant and Pearl's double identities, being a foreign firm and an old Chinese hand,
made them more attractive as JV partners to explore China.

The alliances

formed by Superior and Giant, and Pearl and Dion illustrate the changing
patterns of international competition through the use of IJV between foreign firms
(Pan & Tse, 1996).
The four sample parents' overall experience has demonstrated that the choice of
partners with compatible objectives and resources (Shenkar, 1990; Geringer &
Hebert, 1989; Schaan, 1983, 1988; Luo, 1997a; Fey & Beamish, 2000) and/or
cultural traits (Parkhe, 1993a; Luo, 1997; Graffith et al., 1998) can create a precondition for co-operation. Firms can in fact start exercising control from early
stages of the courtship process through selecting partners with compatible
qualities (Luo, 1997a; Wong & Ellis, 2002).
The case analysis has also revealed that partner selection and the subsequent
bargaining power composition in each IJV affects not only the transactional, but
also the wider contextual conditions 26 (Root, 1988). Partners who bring to the
26

According to Root (1988), the environment facing FDI can be decomposed into two parts, transactional and contextual
environments. The transactional environment is defined as a set of actual and potential transactions between
multinational enterprises (MNEs) and external parties. Contextual environment includes a multiplicity of external parties
linked by political, economic, social-cultural and technological interactions that can constrain the MNEs' transactional
interactions but do not enter into them. Root (1988) argued that risks which are embodied in the contextual environment
are usually beyond the control of individual firms. If it is seen as unacceptable, the best choice is to avoid. However, if
the extent of contextual risk is considered as affordable, the challenge for those positive investors is to adopt appropriate
strategies to enhance their control over various transactions and hopefully through which to reduce some contextual risks.

25

IJVs critical resources and relationships can create strong bilateral bargaining
forces. Also, their linkages with the government bodies can further complicate
the already complex IJV environment. Indeed, forming JVs in China with stateowned enterprises inevitably blurs the boundary between transactional and
contextual environments (Shan, 1991). The ties that the state-owned enterprises
have with various government organisations can have positive and/or negative
influence over the JV operations and performance. This in turn influences the
types and the operation of such controls that the foreign partners adopted. The
difficulties that Marlee faced in some of the JVs formed with local leaders
demonstrate the negative effects of the network ties. On the other hand, SGP
China, Superiors IJV which included a Chinese partner, benefited from the wider
relationship networks. The findings of this research support Chua and Mahamas
(2007:47) view which see alliance is nested within a larger and complex network
of interorganizational relationships that materially influences the operation of
accounting controls.
The above analysis has generated new insight about IJV control.

Strategic

mission creates an enacted environment influencing a firm's choice of JV

partner(s). The choice of partner(s) then creates a specific bilateral bargaining
power composition which on one hand may change the enacted environment
through the JVs influence over the transactional and contextual conditions, and
one the other hand direct the choice of control mechanisms, extent and focus.
This finding is consistent with Dekkers (2008:916) view that the partner
selection phase can strongly influence later stages of the collaboration, including
the use of governance arrangements.
The choice of IJV partners and the subsequent bargaining power composition
creates multiple layers of enacted environments between different variables
comprising a control package.

The reflexive process has illustrated that the

original assumptions of a single layer of interactions between strategy, structure,

26

control and the environment (see Figure 1) are over-simplistic. The new insight
has led to the first modification of the conceptualisation (refer to Figure 2).
5.3 Control - mechanism, extent and focus dimensions
5.3.1 Mechanism dimension of IJV control
Insert Table 3 here.
Table 3 outlines the control mechanisms the four sample firms applied to their
IJVs. The majority of the mechanisms found are similar from one case study to
another.

For example, all of the four sample parents used their relatively

stronger bargaining positions to both encourage and pressurise their partners to

co-operate. They shared key resources with the partners and were prepared to
compromise as long as their strategies in China were not challenged.
Nomination of JV senior managers was another popular mechanism chosen by
all of the four sample firms (Schaan, 1983, 1988; Groot and Merchant,
2000;Chalos & OConnor, 2004), regardless of their different background or
shareholding in each IJV. Filling the key JV posts with their managers, who often
possessed both linguistic and cultural abilities to run businesses in China,
provided the supplying partners with a higher degree of control over the enacted
IJV environment (Martinsons & Tseng, 1995; Kumar & Seth, 1998).
The rights to design the performance evaluation and reward as well as reporting
systems for their IJVs are another two commonly used mechanisms across the
four case studies. By linking JV managers' rewards and career prospects with
the performance measuring system, the designing parent can align the
executives' behaviour in line with their and/or the IJV's best interests (Schaan,
1983, 1988; Groot & Merchant, 2000).

The operation of this mechanism

depends entirely on the supply of relevant and timely information about the IJVs.
The right for designing the reporting system complements the former control tool.

27

The formal procedures and structures embedded in the reporting relationships

provide the designing partners with further administrative control over the IJVs
and their managers (Hopwood, 1974).
The case details have repeatedly demonstrated that the set of control
mechanisms was carefully put together in order to reinforce the effectiveness of
one another. These findings have supported the importance of studying control
as a package as various control mechanisms which apparently serve different
purposes are indeed interlinked, and in some cases complementary or
interdependent to the others (Sandelin, 2008; Malmi & Brown, 2008).
Despite the similarities in the choice of control mechanisms, this research has
also revealed that the degree of emphasis and the ways in which the reward and
reporting mechanisms were used in each case study bear some degrees of
uniqueness.

For example, Marlee and Superior took the annual budgetary

exercise seriously and formally, and were using this tool and the associated
performance measurement and reward systems as key mechanisms of control
over their subsidiaries world-wide. On the other hand, Silky and Pearl, whose
founders were still actively involved in management at both strategic and
operational levels, applied their control mechanisms in a more personal, direct,
and often informal manner. Also, formal conflict resolution provisions and internal
exclusive agreement (IEA) to secure outright control were only adopted by Silky,
the smallest sized operation out of the four sample firms.
When the case analysis progresses on to the orientation of the identified control
mechanisms, new insight is gained which challenge parts of the original
conceptualisation. The empirics has shown that it is indeed more realistic to
think of the range of control orientation as a continuum, rather than just two polar
types, positive and negative, as Schaan (1983) advocated. There are hybrids,
such as bargaining power, located at various scalars across the positive-negative
control continuum that can serve either or both of the purposes depending on the

28

exact ways in which they are implemented.

IEA is another hybrid example.

Excluding the local partner from decision making for the IJV is an apparent
negative control device that Silky used.

However, Silky's Chinese partner

preferred having regular profits without taking on undue risk. IEA met the needs
of both partners and it had a positive impact on the partnership.

Figure 3

graphically demonstrates the new understanding.

Insert Figure 3 here.
Under the influence of their respective strategic missions and bargaining power
compositions in the IJVs, the four sample parents adopted different combinations
of positive, negative and hybrid control mechanisms in order to safeguard their
interests and promote desired behaviour (see Table 3). The concept of positivenegative control orientation continuum and the use of hybrid type of control
mechanisms have not been reported in the existing IJV literature, and these are
contributions to knowledge from this study. The discoveries have refined the
conceptualisation, which was last updated in Section 5.2, and led to the second
modification of the model (refer to Figure 2).
5.3.2 The extent dimension of IJV control
Building on Killing's (1983) taxonomy, eleven IJV functional areas are used in this
research to measure the extent of IJV control each parent gained 27.

Moreover,

using Glaister's (1995) framework, seven types of decision-making methods are

adopted to assess the jointness of decision-making among various IJV parties 28.
Table 4 summarises the analytical findings on control extent.
Insert Table 4 here.
27

They are pricing policy, product design, production scheduling, production process, quality control, nominating JV GM,
nominating or replacing functional managers, budgeting of sales targets, budgeting of cost targets, budgeting of capital
expenditure and public relations. Nominating JV GM and the last two items on the above list were not included in Killing's
original taxonomy. Nonetheless, I believe that the distribution of control over these aspects can shed further insight on the
extent of control that JV parents exercise under the unique environment in China.
28
They are: (1) by the JV senior managers alone, (2) by the local parent alone, (3) by the foreign parent alone, (4) by the
JV senior managers with input from the local parent, (5) by the JV senior managers with input from the foreign parent, (6)
by the local and the foreign partners, and (7) by the JV senior management and all partners.

29

The summary shows that the existing co-operation in decision-making was

mainly between the foreign partners and JV managers who were often appointed
by the former. The four sample firms were indeed focal partners of their IJVs.
Despite this apparent one-sided evidence, it seems inappropriate to classify the
four parents' control styles and their IJVs as dominant partner IJVs.

It is

because the sample firms did not monopolise control over the entire range of
activities as if each venture had only one partner (Killing, 1983). They shared out
some degrees of control with their partners and/or JV managers. Although the
number of areas applied might be fairly narrow, the underlying intention of
allowing other parties to have a say in JV management makes this form of
control different from dominant partner IJV. The focal partners' motives to share
out some control were to maximise the overall control and benefit that they could
subsequently gain from the IJVs.
For example, public relations is a common functional area that all JV parties were
involved in with respect to its activities and decision-making. The focal partners
might have realised that guanxi, the human relationships, is a vital part of doing
business in China (Shenkar, 1990; Newman, 1992; Martinsons & Tseng, 1995;
Weidenbaum, 1996; Luo, 1997; Wong & Ellis, 2002).

However, building up

relationship properties is costly and time-consuming.

These characteristics

reinforce the appropriateness of drawing on the strengths of various parties on

public relation activities.
The analysis has also found that JV management was granted more autonomy in
making production-related decisions either independently or jointly with the
foreign partners (Glaister, 1995). The trend might be driven by the fact that the
implementation of advanced technology and other production decisions often
require direct involvement and first hand information, and this makes JV
managers the most suitable candidates. However, many JV senior managers
were in fact expatriates from the focal parents. Therefore, the joint decision-

30

making model was somewhat a quasi-decentralised policy, as the focal partners'

control over production decisions of the IJVs had not been diluted.
In summary, various combinations of interested parties made different types of
decisions for the IJVs. Because the share of decision making authority was often
based on the pressing interests and/or the strengths of individual parties, it
seems appropriate to classify the sample parents style of control as split control
(Geringer & Hebert, 1989; Glaister, 1995; Yan & Gray, 1995).

Driven by their

respective investment missions, the four sample firms tailor-made their control
packages and obtained a larger scope of control in their IJVs in China. In fact,
their partners followed the same approach.

While the extent these passive

partners controlled might be tight, the narrow scope was what they needed.
Commanding a small range of functions is not synonymous to failure in
controlling IJV.

Similarly, controlling a broad range of activities does not

necessarily mean success. There are financial and behavioural implications of

holding too little, or too much, control in a co-operative relationship (Schaan,
1983, 1988; Lecraw, 1984; Geringer & Hebert, 1989; Demirbag & Mirza, 2000).
The current configuration of control extent in each sample IJV is a joint product
derived from individual partners' strategic choice.
5.3.3 The focus dimension of IJV control
The investigation on control extent has already opened up the discussion of the
focus dimension of IJV control. However, the central thrust of analysis here is on
the degree of strategic importance, not the quantity, of functional aspects that
each parent controls in their IJV.
As discussed before, although the focal partners had emphasised the importance
of significant control, they did not monopolise control over all JV functions. There
seems to be a common misconception that JV partners always fight for control.
Along with this line of thought, multiple-parent has often been seen as a key
reason for unsatisfactory JV performance (Killing, 1983; Shenkar, 1990;

31

Kamminga & Van der Meer-Kooistra, 2007). These assumptions, however, may
not be applicable to all IJVs. For instance, the sales and most of the systems of
the TianJin JV were driven by Pearl. An interesting fact is that the local partner,
NS, encouraged Pearl to lead the IJV. Their limited experience in international
business urged NS to rely on Pearl. In contrast to its leading position in TianJin,
Pearl took up a supporting role in the IJV with Dion.

Pearl wanted Dion's

technology and automotive market. The desires led them to accept a supporting
role in the JV management.
Another example can be found in the Superior case. Based on their strategy to
penetrate the Chinese market, marketing, production process, quality, and
product design were critical to Superior. Giant aimed to expand its business at a
lower cost, and their main contributions to the IJVs included capital funds and
experience in production and distribution in China.

Accordingly, Giant was

concerned about how the capital was used and whether the IJVs were profitable
and growing.

Capital investment was a decision area that all partners were

involved in through their directors' representation on the JV Board. Giant was

also helping the IJVs and Superior to establish their relationships and distribution
networks in China.

Alongside the formal reports for Superior's regional

headquarters, the IJVs also provided Giant with monthly summarised financial
reports.

Following its investment objectives, control over a small range of

functions and the concise monthly financial reports were what Giant needed. In
Superior and Giant's relationship, one party wanted more and the other needed
less control. In addition, the two partners also worked on their relationship 29.
There was a lot of give and take in this JV marriage.
If we believe that the main reason to engage in complex JV relationships is to
benefit from the association with other partners (Blumenthal, 1995), successful
parents should focus their efforts on strategically important activities and
29

For instance, Superior let Giant appoint the Chairman for SGP HK. This Chairman was merely a symbolic figurehead,
while the Managing Director, an experienced expatriate of Superior, was the boss of the JVs. Out of courtesy, the
Managing Director would acknowledge the Chairman and asked for his/her approvals on all major decisions.

32

decisions (Schaan, 1983; Lecraw, 1984; Glaister, 1995; Mjoen & Tallman, 1997;
Groot & Merchant, 2000). As Schaan (1988) rightly pointed out, interests of one
partner are best served when those of everyone else are also fulfilled. It is
undoubtedly difficult for one partner to achieve its strategy without causing upset
to the others (Blumenthal, 1995). One necessary pre-condition for this to happen
is to select partners who hold compatible traits (see discussion in Section 5.2).
Although China's entry in the World Trade Organisation implies that laws and
practices of international business should, or will soon, begin to apply, the
traditional way of doing business through bamboo networks 30 (Weidenbaum,
1996), ties of state ownership and reciprocal benefits continuous to prevail (Child
& Tse, 2001; Buckley, 2007). Foreign investors may well be confronted with
greater needs of adaptation and information in China (Martinsons & Tseng, 1995;
Pan & Tse, 1996; Luo, 1997, 1997a). The overall situation further reinforces the
importance of choosing compatible partners.
Having completed the case analysis on the focus dimension of IJV control, new
insight has raised questions not only on the original conceptualisation, but also
the understanding established at earlier stages of the analytical process. The
conceptualisation has initially assumed that the three control dimensions;
mechanisms, extent and focus; are integrated to form the control variable, and
they are subject to the same degree of influence from the other variables
comprising a holistic control package (see Figure 1). However, the latest findings
have reflected that the enacted environments created by the IJV strategic
mission and the bargaining power structure determine the "critical areas" that a
partner "should focus on", i.e. the control focus.

Once the control focus is

identified, the parent firm then selects the extent of business functions and the
range of control mechanisms that best suit their strategic missions.

The

decisions that a partner makes on the control focus, extent and mechanisms will
collectively create another layer of enacted environment, which may support or

30

Relationship and business networks established between local and/or overseas ethnic Chinese (Weidenbaum, 1996).

33

hinder the implementation of IJV strategic mission as well as partner

relationships.
For example, having set a strategy to penetrate the local markets, there were
critical IJV functions, such as product designs, production and marketing, that
Marlee needed to focus on. Under the strong bilateral bargaining forces in their
IJVs, Marlee carefully selected the control mechanisms and control extent in
order to support the critical strategic focus. The provision of firm-specific assets
(FSA), such as world-wide brands and technologies that was vital to the JV
operation, not only earned Marlee a strong bargaining position in the partnership,
but also a direct involvement in the implementation of the technologies in
production, sales and marketing. In order to protect FSA and deploy strategies,
Marlee held the right for staff nomination, which included the general manager
(GM), for all of their JVs in China. According to the Chinese JV Law, JV GM is
empowered by the JV Board with the highest operational authority to deal with
both internal and external affairs. Through staff provision, Marlee obtained direct
and/or indirect control over a broad range of strategically important IJV functions.
The use of expatriate staffing was also found in prior JV studies; such as Schaan
(1983); Kumar & Seth (1998); Chalos & OConnor, (2004).
To reinforce the effectiveness of staff provision, Marlee also held the rights for
designing the performance evaluation system and tying the JV managers'
rewards to the achievement of the IJV missions. In addition, reporting system
and relationships were used to reinforce the effectiveness of the other selected
control mechanisms. A combination of choices that Marlee made on the control
focus, extent and mechanisms created a layer of enacted environment which
supported the implementation of the Group's strategies and in the majority of
IJVs supported the bargaining power compositions among partners. In a few
older IJVs though, Marlee's choice of the control mechanisms and extent once
caused disagreements between partners.

34

There is substantial evidence in the other three case studies showing the ways in
which strategic foci drove the decisions on control mechanisms and extent.
Silky's decision to take up the exclusive agreement in response to the Chinese
partner's idea about converting the IJV into an exclusive sub-contractor, under
which case customers would have a bigger say in production scheduling and
methods, is a valid example to explain the above arguments.
The case analysis has discovered that focus, mechanism and extent dimensions
are indeed "located at different levels" and "play different roles" within the control
variable. Also, decisions for the three control dimensions are influenced by, and
at the same time influence, the enacted environments that are created by the
strategic mission and bargaining power structure of an IJV. These interchanging
forces are circular and iterative. This finding has not only challenged the linear
assumptions on environment and organisation design that underlie many of the
earlier contingency studies, but also the later view of a two-way relationship
between the two forces (such as Miles & Snow, 1978; Govindarajan & Gupta,
1985; Otley, 1980; Emmanuel et al., 1990). This research has demonstrated
empirically that their interactions are iterative, not just one- or two-way. The new
understanding suggests a need to reframe the conceptualisation that was last
updated in Section 5.3.1. The third modification is a continuation of the theoryempirics dialogistic exchange to refine our understanding of the roles of, and
relationships between, various contingency variables comprising a holistic control
package (refer to Figure 2).
5.4

Control - IJV performance - an interdependent relationship

The final part of the case analysis is to examine the means-end relationship.
Despite the unique enacted environments in China, having applied their
respective control packages three out of the four focal partners either achieved or
exceeded the aspirations set down. During or soon after the empirical work took
place, Superior, Marlee and Silky were already committed to other new
investments in China. Their decisions to put further investments in the country, in

35

JV or wholly owned formats, at such a quick pace were significantly influenced by

the good overall experience from their existing investments.
Pearl was the only sample parent who failed to fulfil the key IJV mission in
TianJin. There were major problems embedded in the contextual environment in
TianJin31 that Pearl's control package was unable to cope (Root, 1988).
However, the Group's enthusiasm in forming JVs was unaffected by the
experience.

Perhaps Pearl had realised that without the local partner's

contribution, its financial losses and learning curve would have been steeper.
This research has only examined the control packages the sample firms applied
to their IJVs in China at a particular period of time. The configurations of these
control packages are likely to change over time (Killing, 1983; Zhang & Li, 2001;
Kamminga & Van der Meer-Kooistra, 2007). For example, Pearl further tightened
its control over the TianJin JV in light of the slow progress the subsidiary made.
The disappointing outcomes also put strains on the partner relationship.
Meanwhile, the satisfactory results led Silky to widen its overall strategy in China
to include penetration of the local markets.

Likewise, bargaining power is time-

and situation-specific (Harrigan & Newman, 1990).

The strong bargaining

positions the sample firms held in their Chinese JVs are likely to shift when their
partners and/or the IJVs' dependency on their critical resources gradually
diminishes (Yan & Gray, 1994; Inkpen & Beamish, 1997; Zhang & Li, 2001). The
sample partners need to adjust their strategic foci according to the strategic
missions set out for each stage of the IJV life cycle, and take steps, such as
reconfiguring the control mechanisms and extents, to align the shifts in
bargaining power composition among IJV parties, a situation which can trigger
any "dormant instability" hidden in the relationship (Inkpen & Beamish, 1997,
p.196).

31

According to the JV GM, the problems were mainly caused by the inconvenient location of, and inadequate industrial
infrastructure in, TianJin to support small investments.

36

The new insight gained has not only challenged parts of the conceptualisation of
this research, but also the views underlie some existing literature which see
organisation performance simply as an outcome (Otley, 1980; Hopper & Powell,
1985; Killing, 1983; Govindarajan & Gupta, 1985; Simons, 1987; Govindarajan,
1986; Govindarajan & Fisher, 1990; Yan & Gray, 1994; Mjoen & Tallman, 1997),
or a cause (Zhang & Li, 2001) of control.

This study has identified that

performance has a feedback impact on organisation learning (Otley, 1999), and

on the evolution of control design over time (Zhang & Li, 2001). Since evolution
is a continuous process, when we examine an on-going JV business, its
performance indeed represents an antecedent, an element and an outcome, of
control, and visa versa. This finding illustrates that the relationship between
different variables comprising a holistic control package, which includes IJV
performance as an inextricable part, is indeed the one of interdependence rather
than cause-and-effect (Norreklit, 2000).

The new insights have reshaped the

conceptualisation which was last updated in Section 5.3.3. Having made the
fourth and final modification to the conceptualisation (see Figure 2), the case
analysis and the model development process is now completed.
5.5

Conclusion of the case study analysis and major findings

Throughout

the

investigation

process,

the

understanding

of

individual

contingency variables; more importantly their complex relationships and roles,

potential synergy and evolution; has been continuously developed. Parts of the
understanding established at earlier stages of the case study analytical process
has been enriched, and in some places challenged, by new insight gained at the
later stages.

For example, the empirical findings on control focus suddenly

opened up new questions on the exact roles played by the three control
dimensions and their relationships with the other contingency variables
comprising a holistic control package. The questioning process has led to new
understanding, and it indeed reflects the strengths of the two-stage model
development approach and the case study method that have empowered the
researcher to reflect upon, and learn from, the conflicting realities (Eisenhardt,

37

1989). The sense-making process has led to four modifications and gradually
developed the conceptualisation into an integrative model of IJV control, as
Figure 2 shows, which highlights the unique enacted environments in which the
control packages operate and from which the model is derived.
This study has generated some meaningful contributions to knowledge.

For

example, the use of IEA as an effective control mechanism has not been
reported in the existing IJV literature. Also, the case analysis has revealed that it
is more appropriate to think of the range of control orientations as a continuum,
rather than two polar positive and negative types as Schaan (1983) initiated.
There are hybrid mechanisms located at various scalars across the positivenegative control continuum that can serve either, or both, of the purposes. This
research has also uncovered that the interactions among different variables
comprising a holistic control package are circular and iterative. The configuration
of a control package is likely to evolve over time. Since evolution is a continuous
process, IJV performance represents a cause, an element, and an outcome, of
control, and vice versa. While managers and academics are eager to identify
what firms can do to enhance their IJVs' performance (Mjoen & Tallman, 1997;
Fey & Beamish, 2000; Zhang & Li; 2001), the answers to their concerns are to
understand the design, implementation and evolution of the control packages
that partner firms adopt in order to fulfil their investment goals and objectives.
This research has integrated contingency logic with transaction cost analysis and
social reasoning to conceptualise parent control of IJVs. The formation of an
integrative model through using a two-fold process and case study method is a
major contribution from this study. According to the advancement made on the
understanding of IJV control, this research has fulfilled its objectives. Future
research opportunities prompted by the achievements and limitations of this
study are discussed in Section 6.
6.0

Limitations of this paper and suggestions for future research

38

This research examined control mainly from the focal parents' perspective 32, and
unavoidably understated the parts other partners play (Yan & Gary, 1995;
Glaister, 1995).

Future studies may examine control from multiple partner

perspectives, whether they are dominant, equal or passive partners.

Given that this research entails intensive study of a small number of cases, it
would be incorrect to claim for population validity in the examination of external
validity (Scapens, 1990; Gill & Johnson, 2002). The integrative model of IJV
control this research developed needs to be replicated and fine-tuned in a larger
number of IJV samples in China or other countries. Researchers of different
nationalities and backgrounds can be brought into the team to reduce bias in the
observation and interpretation of empirical details.
This research has revealed a range of control mechanisms, which serve positive,
negative and/or hybrid orientations. As research advances in the field, a fuller
understanding of their inter-relationships should be developed. Also, this study
has uncovered iterative interactions among contingency variables comprising a
holistic control package. Longitudinal (Glaister, 1995) and case-based studies
(Langfield-Smith, 1997) are appropriate to observe how the roles of, and the
relationships between, various contingency variables change over time.
The current research has demonstrated some potential use of an integrative
approach in the study of control practice within contemporary IJV settings
(Geringer & Hebert, 1989; Parkhe, 1993; Mjoen & Tallman, 1997; Griffith et al.,
1998; Kumar & Seth, 1998; Chenhall, 2003). However, it has only scratched the
surface and there is much scope for further exploration.
Although this study has achieved fruitful results and provided answers to the
research questions asked, it has also generated further questions that need to be
32

The decision to concentrate on focal partners was also driven by the high degree of integration between the focal
parents and the IJVs' operations. Rightly or wrongly, I believed that by concentrating on the focal parent, it would shed
light on both the focal partner and the IJV's control strategies. Given that it was an ambitious project for a one-person
research team, I decided to concentrate on the focal partners in order to keep the study to a manageable size.

39

resolved. It is intended to develop research studies to follow up some of the

opportunities mentioned above. Given the growing importance of IJVs and other
forms of interfirm co-operation, more research effort should be directed to the
critical control issues that are central to the success of these alliances.

40

Table 1
Information about the four sample partners of the case studies
The names of the companies and interviewees have been disguised to ensure
confidentiality.
Superior

Marlee

Silky

Pearl

Country of
origin:

United Kingdom

United Kingdom and

Holland

Hong Kong

33

The time that

the firm
started to
invest in
China
Number of
investments
in China
Forms of
invest
ments
in
China
Interviewees
and
their
positio
ns

From 1920s and

ended in 1956
2nd round FDI
started from 1994

2 x JV

12

John Smith,
Manager of Asia
Pacific Liaison,
Superior UK
Headquarters

Dennis Wong,
Financial Director
of SGP HK and a
Board of Director
of SGP China

From the early

1920s and ended
in 1953.
2nd round FDI
started from 1986

Bermuda registered,
Hong Kong-based
group

1986/7

1986

1 x holding
company
2 x wholly owned
9 x JV

2 x 34PCTA
1 x wholly owned
1 x JV

7 x wholly owned
2 x JV

Harry Evans,
Financial
Controller &
Treasurer of
Marlee Holding
China

Peter Li, Founder

& Chairman of
Silky Group

David Wong,
Production
Manager of Pearl
Video

Sam Margarina,
Managing Director
of Pearl Video

Ming Chau, GM of
Pearl TianJin JV

Ken Ng, Controller

of Sales &
Distribution, China
operations.

Richard Mather,
Managing Director
of SGP HK and the
Chairman of SGP
China

33

Pearl was founded in Hong Kong and its current registered address is in Bermuda. It is stated in Pearl's annual report
(1994) that the Group's head office and principal place of business remains in Hong Kong.
34
Process and compensation trade agreement.

41

Table 2
A summary of the four sample partners' motives
of investing in China
Superior
1. Penetrate the
domestic markets.
2. Nature of
products requires
local production.
3. Lower production
costs in China to
serve the local
market.
4. Strategic motive
- to complete the
Groups production
network in
Southeast Asia.
5. Defensive
reaction.

Marlee

Silky

Pearl

1. Comply with
Marlee Groups key
objective, to become
a real world-wide
business via
overseas expansion

1. Need to seek
alternative
production
bases to
remain
competitive.

China in general:
1. To get access to
China's cheap
land and labour to
lower operational
costs.

2. Strategic
importance of China
to the Groups current
business strategy - to
invest in emerging
markets.

2. Lower
operational
costs in China.

2. To establish
production bases
in China and
reduce reliance on
the Hong Kong
operations.

3. Defensive reaction.
4. To penetrate the
Chinese markets.

3. Availability of
lower cost raw
materials in
China at a.
4. Geographic
and culture
proximity
between Hong
Kong and
China.

3. To improve
profitability.
4. To explore the
China domestic
markets.
5. Geographic and
culture proximity
between Hong
Kong and China
TianJin IJV:
6. To become one of
the pioneers to
invest in
electronics
production in
Northern China.

42

Table 3
A comparison of the control mechanisms adopted by the sample
partners in their IJVs in China
Types of control mechanisms
Staffing, nomination of
managers, GM in particular

key

JV

Resource supply to the JVs:

*Orientations

Superior

Marlee Silky

Pearl

---------

---------

-------

-------

---------

---------

-------

-------

Firm-specific assets
---------------------------------------------------Raw materials
---------------------------------------------------Sales and export opportunities
and

Design of performance evaluation and

reward systems

Design of
relationship

Internal exclusive agreement

Bargaining power

Veto right

Conflict resolution provisions

Design of
process

budgetary

reporting

system

system

and

* P = positive, N = negative, and H = hybrid orientations.

= an important control mechanism and is heavily used by the sample parent.

= a chosen control mechanism and is used only to some extent by the sample parent.

= a control tool that is not chosen by the sample parent.

43

Table 4
The extent of control and jointness of decision-making
in eleven selected business aspects of the sample Chinese IJVs
Business
decisions
Product
pricing
Product
design
Production
process
Production
scheduling
Quality

Nomination
of JV GM
Nomination /
replacement
of functional
managers
Sales
Budget
Cost Budget
Capital
Expenditure
Budget
Public
Relations

(1)
JV
managers
alone
Superior
Marlee

(2)
Local35
partner
alone

(3)
Foreign36
partner
alone
Silky
Pearl
Superior
Marlee
Silky
Pearl

Superior
Marlee
Silky
Superior
Marlee
Superior
Marlee
Silky
Pearl

(4)
JV &
local
partner

(5)
JV &
foreign
partner

(6)
Local &
foreign
partners

(7)
JV &
all
partners

Pearl
Silky
Pearl

Superior
Marlee
Silky
Pearl
Silky

Silky
Pearl
Silky
Pearl
Silky

Superior
Marlee
Pearl
Superior
Marlee
Superior
Marlee
Superior
Marlee
Pearl
Superior
Marlee
Silky
Pearl

Figure 1
35

For decision making methods (2), (4) and (6), the term local partner(s) in SGP HK and SGP China refers to Giant, and Giant and
IDC, respectively. For the Pearl case study, the analysis of jointness of decision making focuses on the TianJin IJV only, and the term
local partner means the Chinese partner, NS.
36
For decision-making methods (3), (5) and (6), the term "foreign partner" in SGP China and SGP HK refers to Superior unless
otherwise stated. For the Pearl case study, the analysis of jointness of decision making focuses on the TianJin IJV only. The term
"foreign partner" refers to Pearl.

44

Conceptualisation of control of IJV

External Environment

IJV Strategic Mission

Bargaining Power
Composition Among Partners
Control
Mechanisms
Positive or negative
orientation

Extent
Focus
Dominant,
independent,
share, or split
control

Broad,
equal or
narrow
focus

Environment

Achievement of the
IJV strategic mission

External environnent
Enacted environnent

45

Figure 2
A holistic package of IJV control
External Environment

IJV Strategic Mission

Bargaining Power
Composition
Among Partners
Strategic Focus of
control
Extent
Independent,
share, split or
dominant
control

Mechanisms
Positive-negative
control
continuum

Environment

Achievement of the
IJV strategic mission

Represents multiple layers of enacted environments.

Represents the iterative, circular motion of interactions between the
choice of IJV strategic mission, bargaining power composition among
partners, control (in terms of focus, extent and mechanisms), IJV
performance and the external environment.

46

Figure 3
Positive-negative control orientation continuum
From the sample partner firms' perspective

Positive
orientation

Negative
orientation

Internal exclusive
agreement (IEA)

Bargain power

and

represent influences

47

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