Parent Firms of Joint Ventures

P atomic number 18nt Firms of Joint VenturesAre joint-ventures and their pargonnt steadfasts much closely related in impairment of skill-relatedness than in cost of value-chain?AbstractThe indue amongst joint-ventures and their p arnt faithfuls is a fairly stark naked topic of research in the field of variegation. In the process of determining the actual parent firm of a joint-venture out of every last(predicate) option industries, it turned our that both vertical- and skill-relatedness proved to be signifi micklet. The results indicate bring forward that skill-relatedness is more predictive in this process than vertical relatedness and that joint-ventures are more likely to energize parents that have skill overlap to their indigenous activity than industries that do not. These results hold for the entire sample and a subsample of manufacturing firms. An another(prenominal) finding is that joint-ventures and their parents tend to be more closely related in skills than their parents active in the joint-venture. Suggesting that joint-venture are a mechanism to reduce cognitive distance and increase the sorbefacient capacity of the tender cognition being transferred.1. IntroductionDiversification and relatedness in the midst of firms has been astray researched and finds their theoretical foundation in Coase (1937) Penrose (1959) and others. Coase (1937) bottom of the inning be regarded as one of the depression to address the action bes theory, while Penrose (1959) addressed the resource establish conniption of the firm. Both theories invent the basis of m either empirical research to understand more about variegation doings of firms. These theories at that placefore form a basis for further research in diversification and especi every(prenominal)y in the distance between joint-ventures and their parents for this written report.Out put produced by one industry often form the basis of business in other industries. It makes sparing sen se to integrate these activities into already exist activities to improve efficiency, make the company less dependable on their primary activity and expand the company, in order to achieve harvest. Fan and Lang (2000) found this already before in their research about diversification. Firms tend to have minute of arcary segments that are related in terms of in-output. This vertical integration of activities is most likely to occur when facing high food trade performance cost.Neffke and Henning (2010) in any brass investigated diversification behavior of firms using in-output relatedness. Their research however introduced a new measure of skill-relatedness, which turned out to be dominant in predicting diversification behavior of firms. Conform the resource based view, regarding human capital as the prime plus of the firm, their research firstly compared observed job switchers against the predicted job switchers between current industries. Individuals gain, certain specific skills during their working life and can only redeploy this association (know-how) in other industries which posses most degree of association overlap. If this is not the case, reverse will only hurt the individual, since he or she will be not valued for all(a) acquired skills during his working life. This measure of skill-relatedness between industries proved to pass by in-output relatedness and supported the resource based view in diversification activities of firms.While diversification behavior and relatedness is widely researched, this is not the case for the kind between joint-ventures and their parents. A joint-venture is a separate legal entity (Harrigan, 1988) and has at least devil parents, who are in joint-control and reliable for their equity share in the joint-venture. This paper will discuss, why a joint-venture might be preferred over alternatives and how this might influence the distance between joint-ventures and their parent firms. This will provide new insi ghts in the relationship between joint-ventures and their parent firms.In order to investigate the relationship between joint-ventures and their parent firms and testing for dominant agency in this relationship, this paper used a sample of 237 German joint-ventures between 2005-2011 and constructed an average vertical relatedness according to Fan and Lang (2000) for German industries between 2005-2007. It than included the skill-relatedness of Neffke and Henning (2010) based on Swedish labor switchers between 2004-2007. These data al misfortunateed us to make an overview of all joint-ventures and all industries in which it can have their parents. We then tagged the actual parent firms of the joint-ventures with a one and all other industries with a zero, allowing us to run a logit regression with the actual parent firms as our dependent variables. The findings indicate, that the resource based view is the dominant mode in explaining distance between joint-ventures and their parent firms. This provides more insight in the immenseness of close relatedness in terms of skills over other forms of relatedness.In the quest chapter, we start with a theoretical manakin about diversification and argue that the resource based view can be regarded as the most principal(prenominal) in diversification moves. We will then discuss the alternative diversification possibilities and the limitations of diversification. This will be followed by a discussion of the most important strategic motives on joint-ventures choice. These strategic motives and the theoretical theoretical account will be summarized at the end of chapter 2 and we will explain how this all will relate on the distance between joint-ventures and their parents. In chapter 3 we will discuss empirical evidence on diversification and joint-ventures and their implications on our research. Then we will follow with a data discussion and our method of research in chapter 4 and 5. The results and out findings will be presented in chapter 6 and the concluding chapter will discuss our outcomes, provides just about more insight in the distance between both parents active in the joint-venture, limitations, policy implications and future research.2. Theory on diversification an introductionThis paper investigates the distance between joint-ventures and their parents. Before we can have a look at this relation, we start with a theoretical framework about diversification and the implications of this framework for our research. Thereafter, we will explain more about diversification motives and the problems and limitations firms might face when diversifying. We then summarize all this and discuss how this all relate to our evaluate findings on joint-ventures and the relatedness with their parents.2.1 Theoretical framework behind diversification strategiesA theoretical framework behind diversification strategies will be discussed in the coming chapter. This theoretical framework provides more insigh ts in the diversification motives of firms. After these motives have been discussed, we can discuss their influence on the distance between joint-ventures and their parents at the end of chapter 2.2.1.1. Transaction cost theoryThe transaction cost view is a theory of Coase (1937) and Williamson (1975, 1985) and addresses the view that economizing is the core problem of economic organizations. The core of these problems in organisational context beat in the assumptions of incomplete information and self interest seeking firms / people. Incomplete information in contracts implies that it is impossible for individuals and firms to predict all(prenominal) future event, in that respectfore all contracts are incomplete and exposed to uncertainty of future situation not foreseen by firms and individuals. If these future states / conditions change, the incentives for the individuals and firms involved might also change. In other words, there is room for self-interest of individuals. In t he transaction cost theory, these assumptions of bounded rationality and self-interest seeking are paired and as a result there is room for fraud or guile of economic agents. Economic agents are driven by self-interest and the transaction costs theory allows these agents to deceive, disguise and discomfit in order to maximize their self interest. Opportunistic behavior and moral hazard are thus included in the theory of transaction costs.These assumptions are the basis for the theory of transaction cost and have some consequences, especially when it comes to contract modes and thus joint-ventures. Due to bounded rationality and opportunistic behavior of economic agents, all contracts are incomplete (Williamson, 2006). This means, economic agents have an incentive to behave to their own optimal ex post outcome if situations change which cannot be contracted. The second assumption is contract as promise (Williamson, 2006). This assumes that economic agents will fulfill contracts as p romised. However, this will not be obtained if these agents are given opportunistic opportunities. The transaction costs analysis entails an examination of the comparative costs of planning, adapting, and monitoring task completion under alternative governance structures (Williamson, 2006, p. 58). The transaction will bring the canonical unit of analysis and minimizing transaction cost will result in the most cost-effective governance structure. Transactions differ in three ship canal from each other (1) frequency at which transactions recur (2) level of uncertainty to which they are subjected (3) level of asset specificity involved.Since asset specificity is of crucial importance, we elaborate some more about the characteristics of asset specificity. Asset specificity has reference to the degree to which an asset can be redeployed to alternative uses and by alternative users without sacrifice of oil-bearing value (Williamson, 2006, p. 59). This asset specificity conks of impo rtance in the context of incomplete contracts, while asset specificity can take varied forms (1) physical asset specificity (2) site specificity (3) dedicated asset specificity and (4) human asset specificity.The complexity of a transaction is indeed highly dependent on the asset specificity (k) of the asset and investments in that asset. A supplier can for example use a general purpose engineering science with low asset specificity (k=0) or it might invest in a specialised technology with high asset specificity (k=1). High asset specificity is likely to involve high bilateral dependency between the parties in the transaction. Since the parties involved in the contract become vulnerable of each other, switching is tricky and costly option due to the mutual dependency and the investments done in specific assets. The buyers cannot easily turn to an alternative supplier and the current supplier is highly dependable on the demand of its current buyer. Therefore the higher(prenominal )(prenominal) the asset specificity, the more likely it become that higher contract costs have to be faced. Both parties have more incentives to devise safeguards to protect the investment in the transaction if asset specificity is high. However, if there is low asset specificity (k=0) and we thus have a general purpose asset, contract are easily monitored and marketplace transactions will be preferred.Back to the diversification decision, minimizing transaction costs is regarded of crucial importance for the choice in governance mode. This implies that firms choose between a wholly owned subsidiary, a simple market transaction or a hybrid made, as a joint-venture for example. This trade- rancid between a joint-venture and other governance modes has been widely researched. Hennart (1991) for example found that Nipponese firms start joint-ventures with U.S. counterparts to combine intermediate inputs when they are subjected to high market transactions costs. This paper uses a relat edness in terms of in-output and can therefore measure the distance in terms of the use of intermediate products between industries. The influence on joint-ventures and partner distance will be discussed at the end of chapter 2. At this localize of the paper, it is however important to understand that high relatedness in the use of intermediate products is likely to be caused due to high transaction costs. This would imply that if diversification has a high level of relatedness in value-chain and are thus closely relatedness in terms of vertical relatedness, this is most likely caused by high transaction costs and supports the transaction costs view of diversification..2.1.2. Knowledge and resource based viewIn the resource based view, fellowship (know-how) is regarded as the most important production factor deep down the firm. The origin of the resource based view goes back to the work of Penrose (1959), who inspired the discussion of the resource based view of the firm and the importance of resources to achieve firm growth. Penrose stated that the firm is a collection of productive resources (human and non-human) under administrative coordination and authoritative communication that produces goods and services for sale in the market for a profit (Penrose, 1959, p. xvii). The administrative coordination and authorities communication define the boundaries of the firm (Penrose, 1959, p. xvii). The firm specific human resources are regarded as the most important of all resources within the firm. Without these human companionship, there can be no operating firm. As a result, the firm cannot make decisions, long-term planning, run operations and it can certainly not make any expansions.From this point of view Penrose (1959) indentified two major causes of firm growth. First of all, causes external to the firm and secondly those causes that are sexual to the firm. External causes for firm growth, as capital constraints, cannot be fully understood without an ex amination of the nature of the firm itself (Penrose, 1959, p. 532). We may therefore conclude that firm growth is endogenous to the firm this is a result of two reasons mentioned by Penrose (1959). In order to execute plans and strategic action, human capital is required. After completion of the advise/action, managerial resources will be released with increased acquaintance. These resources gained experience and knowledge during the succession of the expansion and can be redeployed at alternative use after the time of the expansion. The redeployed individuals with an increased knowledge and skills might improve efficiency and organization of the firm, but might also be able to development new or specialized services. Depending on the expansion, individuals involved might also gain unique knowledge of their experience this is particularly true for certain forms of tacit knowledge, which are more difficult to transmit.The theory of firm growth of Penrose (1959) has been regarded a s one of the earliest contributions to the resources based view of the firm, stressing the importance of knowledge as the key production factor within a firm. The drive of firms for growth, is a drive for new knowledge that is not accessible to the firm before their diversification. However, the motives and goals of each diversification differ and so do the resources possessed by each firm in a diversification. These differences and similarities in knowledge are of crucial importance in the resource based view, where acquiring new knowledge is the ultimate goal for achieving growth. Acquiring knowledge comes with certain problems the fundamental paradox of knowledge and the difficulty arising from transferring tacit knowledge are two of those problems. In the fundamental paradox of information it is extreme difficult to watch out the value of the knowledge for the buyer of the knowledge, which causes high contract costs. Since it is impossible for the buyer of knowledge to estimate ex ante the characteristics of what is being bought. On the other hand, if the seller of the knowledge provides this information, he will be revealing important information and transferring his know-how redundant of charge (Arrow, 1959).If the targeted knowledge, is a certain know-how which cannot be patented and protected against spillovers to competitive firms and other industries it become far more difficult. Certain types of knowledge cannot be put on paper and granted a patent. Firms experiences in manufacturing, distribution, and country-specific knowledge, knowledge of markets, customers and especially high educated employees cannot be patented but are of crucial importance of a firms success in the resource based view. This type of knowledge that cannot embody specifications, designs and drawings, but instead is embedded in the individual is called tacit knowledge. (Polanyi, 1959 Hennart, 1988, p. 366). These individual characteristics of experience and social nature make transfer, coordination and spread of knowledge between firms, extreme complex and difficult (Lam, 2006). The transfer and spread of this tacit knowledge is one of the difficulties when facing diversification decisions. The transfer and spread of this tacit knowledge can be done in different alliance forms, which will be discussed later in this paper. However, for now, it is important to know that diversification is undertaking to gain new knowledge, which must be for same part related to the knowledge of the firm. This is the case since the new resources must be redeployed at alternative use after a project, which might be a joint-venture for example. As for distance in diversification, higher skill-relatedness and thus diversification activities that are more closely related in skills stresses the importance of the resource based view.2.1.3. Portfolio management theoryA third and final theory behind diversification motives is the portfolio theory of Markowitz (1952). Diversificatio n decisions of firms are important decisions taken by firms management in order to maximize the expected returns of their portfolio of investments. These investors are the shareholders of the firm and have a claim on the residual value of the company assets, when debt has been paid. In order to maximize this expected return of the firm dramatic shares, the law of large numbers will ensure that the actual yield of the portfolio will be almost the same as the expected yield. In any case, holding a diversified portfolio would be preferred over all non-diversified portfolios (Markowitz, 1952). Increasing variance in your portfolio would mean an increase in the number of projects, since each project would be successful / unsuccessful at a certain probability, which is referred to as risk. Holding a large variety, in other words, betting on more than one horse, increases your probability on having a winning project. The portfolio management theory suggests that diversification tends to t ake place in activities that are unrelated to the primary activity of the firm. If this is the case, diversification activities (such as a joint-venture) would be unrelated to the primary activity of the firm. There would be a large distance between the firm and its diversification activities, while transaction costs and the resource based view are stressing the importance diversification in more closely related activities, although for different motives.2.2 Different diversification alternativesIn all theories discussed, the master(prenominal) driver for diversification is in order to achieve growth. Either, by minimizing transaction costs in the transaction costs economy or by diversification of risk, which increases the probability of a winning innovation. In all these theories is explained how they might influence the distance between diversification activities. Is there however any limit to firm growth in their challenge to innovate and to expand?According to Penrose (1959) th ere is no limit on the size of a firm, however the growth of the firm has some limits it can reach. In the Hercules Powder Company case study Penrose claimedGrowth is governed by a creative and dynamic interaction between a firms productive resources and its market opportunities. Available resources limit expansion unused resources (including technological and entrepreneurial) stimulate and largely determine the direction of expansion. While product demand may exert a predominant short-term influence, over the long term any distinction between supply and demand determinants of growth becomes arbitrary (Penrose, 1959, p.1)How does this reflect to diversification strategies? Penrose (1959) distinguished between different areas of diversification. The firm can be divided into different productive activities, that contain of machines, processes, skills and materials, all closely and complementary associated in the production process, which Penrose (1959) calls the production/technology base. The firm now faces the decision to diversify into a new market using the existing technology base. It might prefer entering an existing market using a new technology base, which is referred to as horizontal/complementary expansion. The last scenario would be to enter a new market using a new technology base. As described above, the ability of a firm to expand and grow is limited by its internal resources, from which human resources is regarded as the most important. Diversification increases the creative and dynamic interaction of a firm and its resources. either these forms of diversification have implications on the expected distance between the diversification activities and thus joint-ventures and our research. Entering a new market using a new technology would probably have a larger distance in terms of skills from its primary activity than entering a new market with an existing technology. In this latest case, the technology and specific knowledge can be partially redep loyed at alternative use, while this is not the case in the first alternative.The main implication from Penrose (1959) famous work is that firms diversify in order to achieve growth. According to Penrose (1959) the resource based view of the firm is the dominant view in order to achieve this growth by diversification. This would suggest that the distance between diversification activities would be more closely related in terms of skills and less closely in vertical relatedness, used as a measure for the transaction costs theory. If diversification is undertaken in order to diversify risk, conform the portfolio management theory diversification activities would not be related at all.2.3 Limits on diversification and diversification distance?There are different diversification forms as discussed in the previous chapter. It is important to understand that firm growth is limited by its human capital (Penrose, 1959). A firm should therefore guardedly choose its diversification activiti es. A clear understanding of these limits and where these limits depend on is extremely important to understand the distance between firms diversification activities.Since this implicitly answers the question, to what utmost firms diversify and is there a limit on the distance between partners and their diversification activity? Cohen and Levinthal (1990) discuss the absorptive capacity of a firm, which indicates the ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends, which is critical to its innovative capacity (Cohen and Levinthal (1990), p. 128). This absorptive capacity puts limits on the commercialization of new knowledge and boundaries on diversification. Cohen and Levinthal (1990) assume that a firms absorptive capacity and the individual absorptive capacities of its employers are largely a function of the firms level of antecedent related knowledge. Earlier research suggest that absorptive capacity might be a byproduct of a firms RD investments and others suggest that firms can also invest this instant in absorptive capacity while investing in specialized education/training. The key to absorptive capacity is that organizations needs prior related knowledge to assimilate and use new knowledge for growing. This is very important for the resource based view in our paper, since this implies that diversification activities of firms should be related in terms of skills. Since, the higher the prior knowledge in ones memory, the higher their ability to acquire new knowledge and the ability to recall and use that knowledge. What is often the case in organizations and especially expected in joint-ventures is the transfer of learning skills across bodies of knowledge that are organized and expressed in similar ways. Mowery et al. (1996) indicated that joint-ventures are the most efficient alliance form for transferring tacit knowledge, which could certainly human specific skills. As a conseque nce, experience or performance on one learning task may influence and improve performance on some subsequent learning task (Ellis, 1965). Cohen and Levinthal (1990) make two important assumptions about knowledge, important for diversification strategies. Firstly, knowledge is cumulative and secondly, learning performance is greatest when the object of learning is related to what is already known (Cohen and Levinthal, 1990, p. 131). This implicit that learning is more difficult in novel domains, in other words radical exploration of new ideas, products, technologies and standards. Diversification might offer an advantage, since with diversification comes a wider knowledge base and as a results an increasing probability that the new knowledge is already / partially known to the organization.The absorptive capacity of an organization however, does not only exist off the aggregated absorptive capacity of its individuals, but also on the ability to exploit this knowledge. Cohen and Levin thal (1990) mention there is a trade-off between high levels of absorptive capacity of an organization and the ability to exploit this. They describe this as a trade-off between inward-looking (specialization) versus outward-looking (diversify) trade-off, where excessive dominance by one or the other will be suboptimal. Exploitation can surmount been seen as specialization of old familiar ideas and certainties in organisational learning, while exploration can best be described as the invention of new technologies, standards, products or ideas in an organization. Cohen and Levinthal (1990) discuss also the importance for innovation of close relationship with both buyers and suppliers, suggesting a vertical relatedness would be beneficial for innovation performance. In the trade-off described, Cohen and Levinthal (1990) suggest that to the keep an effective, creative utilization of new knowledge a portion of prior knowledge should be closely related with a the firm new knowledge, and another part should be fairly diverse, although still related. If this is the case, firm diversification activities should be closely related in terms of skills supporting the resource based view of the firm.Why is it important to have both creative utilization and a portion of prior knowledge is best described by abut (1991), who distinguishes between exploration and exploitation. Returns of exploration are systematically less certain than those of exploitation (March, 1991), this might influence the choice for diversification for the long term however, exploration has long run positive return although this outcome is certainly not ever so the case in the short run. Exploration activities therefore capture much more risk taking, uncertainty, variation, flexibility, discovery and innovation than exploitation. Exploitation is more focused on production, choice, efficiency, marketing, costs and benefits (March, 1991).The importance of exploration is best described in a model of mut ual learning in an closed organization and its personnel in it (March, 1991). The organization is regarded as a storage of knowledge (consisting of procedures, norms, rules and tacit assets) and the organization, accumulate knowledge over time by learning from their personnel. Individuals (personnel) however, are socializing the organizational beliefs, which are diffused to individuals through various forms of instruction, indoctrination, and exemplification (March, 1991, p. 74). This mutual learning approach between organizations and individuals has implications for the choice between exploitation and exploration in organizations and has therefore consequences for the short-run and long-run incentives. In this model of mutual learning organizational code is affected by the beliefs of their personnel, the other way around, the individuals are influenced by the organizational code / norm. Important to know is, that individuals can not influence each other, the influence each other th rough the organizational code. What will happen in this closed model? In this organization, each adjustment in beliefs is served to eliminate the difference between the organizational code and the individual beliefs. If the individuals over time become more knowledgeable about the code, they become also more homogeneous with respect to knowledge and in the end will find an residuum. In this equilibrium the individuals beliefs share the same organizational code. It is therefore important to keep a portion of new knowledge in order to increase the organizational code.March (1991) also describes a second model, evaluating the role of personnel turnover in the organization and upthrow purlieu are considered. The length of service of an individual in an organization has a positive effect on the knowledge of the individual and therefore also a positive effect on the average knowledge of the individuals. A recruit therefore has a negative effect on the average knowledge of the individua ls. The role of turnover on the organization knowledge is more complicated and is a problem of learning rates versus turnover rates. As described in model of mutual learning the strength of the recruit is, the renewing in knowledge, since the recruit posses on average less knowledge than the individual it replaces. Long serving individuals, on average know more, but their knowledge is already reflected in the organizational code over time and therefore they are less likely to contribute to the organizations knowledge base. Now consider environmental turbulence to the organization, this can be the case of processes involving lags in adjustment rates. Consider an organization without personnel turnover, in this organization the beliefs reflected by the individual and these beliefs do not change, although the environment is changing. After some time the organizational code is systematically degraded through changes in reality and a much lower equilibrium is reached. Organizations with a moderate personnel turnover however, are resistant to these environmental shocks and adjust to the new knowledge of the recruits (diversified knowledge).March (1991) extent this model of competitive ecology in a model to compete for scarce resources and opportunities. Assuming the performance of a firm is a measure of the average value (x) and some measure of discrepancy (v), which are normally distributed. An increase in both will increase the probability to gain competitive advantages over competitors. In this part there consist a trade-off between an increase in the mean and the variance. Which supports earlier literature, that diversification is undertaken to gain excess to new knowledge to some extent, but is expected to be related to prior knowledge of the firm. March (1991) conclude that exploration firms compete far more on variance than exploitation firms.2.4 Implications and differences between the theories discussedThe main difference between the management portfolio t heory and the resource based view and the transaction costs view is that the management portfolio expect that diversification tends to take place in unrelated industries, while this is not the case for the other two theories, although at different level of relatedness. The resource based view stresses the importance of knowledge gain and the benefits of this new knowledge in diversification. Transaction costs theory however focuses more on the cost side of the transaction.Leaving the transaction costs as basic unit of analysis to determine an appropriate alliance form, which will minimizes the transaction costs of the firm. According to Wang (2007), a firm shoul