International joint ventures vs. wholly owned subsidiaries

International joint ventures vs. wholly owned subsidiaries

Chan, Peng S


With the relentless onslaught of globalization, many firms are faced with the question of where and how to launch their operations in world markets or to expand and integrate their existing international operations. Some are seeking new outlets for their products and knowhow outside their home markets while others are seeking expansion capital and new technology not available in their own countries. In order to achieve these goals, a firm must determine the appropriate mode for organizing its foreign business activities. Among the vast array of alternative modes available, international joint ventures (IJV) and wholly owned subsidiaries (WOS) represent two primary but largely competing strategic options that a firm may choose. Each of these strategies has different implications for the degree of control which a firm can exercise over the foreign operation, the resources it must commit to the foreign operation, and the risks that it must bear to expand into a foreign country. Thus, the performance of one mode in relation to another is a critical measure of its relative efficacy and would directly affect their choice by firms.

A primary objective of this study was to measure the performance of a sample of U.S. parent companies that were engaged in IJV or WOS in a foreign country. Prior research has concentrated mainly on the study of why IJV is chosen in preference to other alternative modes or under what conditions would IJV be an optimal choice relative to either a contractual mode (e.g. licensing) or WOS. Very few studies have examined the results of the implementation of the various strategic entry modes. This paper focused on the effectiveness of IJV versus WOS and also shed light on the characteristics of firms that pursued these strategies.


In the current global marketplace, strategic alliances in the form of international joint ventures have become a popular mode for entering foreign markets. Traditional direct investment methods, such as setting up wholly-owned subsidiaries, offer the benefits of total profits and full control over the foreign subsidiary. However, the higher costs and risks involved in undertaking R&D, production, financing and market penetration brighten the prospects for expanded strategic alliances between global companies as top management believes that no organization alone can manage all of the high risks associated with transnational ventures (Lei, 1989). In general, the purpose of an IJV is to put together complementary resources of already existing firms. Thus such resources normally comprise not only “ordinary” financial, technical, human resources, but also “acquired” resources like goodwill, know-how, team spirit and other intangible assets.

Despite the growing importance of international business, the subject of global entry strategy outcomes does not seem to have been given adequate attention in the literature. Previous research efforts, both theoretical and empirical, have primarily sought to determine the optimal mode for entering foreign markets. A common tenet of these research efforts is that IJVs are chosen as a first-best (competing) ownership option under specific circumstances. Others have sought to provide the reasoning behind such a choice. Few, however, have attempted to measure the results of the implementation of the entry mode selected. The following section highlights salient literature on the subject of strategic entry modes, in particular IJV and WOS.

Chowdhury (1992) compared the efficacy of WOSs and IJVs on a number of dimensions. If the entry modes were judged by either exit rate or duration of active life (longevity), IJV’s performance appeared to be better than WOS’s. This result seems to contradict numerous other previous research findings which state that, in absolute tens, the instability or failure rate of IJV’s is high (Beamish, 1988; Killing, 1982). Chowdhury argued that the basis for such contradiction depends on how the instability is defined. If a major change in ownership status among active subsidiaries is the operational measure of instability, then the impression that IJVs are relatively more unstable than WOS is entirely borne out. But if exit rate were used as the operational measure of instability, then the WOS option does not seem to have any overwhelming advantage over IJV forms. The reason is that MNEs tend to terminate IJV operations as they gain greater experience in their foreign market. Some MNEs would attempt to acquire a larger proportion of ownership to get full control of that venture. Others might choose to establish new WOSs. We should not, therefore, judge IJV performance based on such changes in ownership.

In addition, Chowdhury found that WOS appear to be slightly superior in terms of export level. However, this result occurred only in young subsidiaries. Such advantage erodes as the subsidiaries grow older. Finally, Chowdhury concluded that WOS offers the MNE an advantage in terms of maintenance of effective control over its subsidiaries. The study indicated that WOSs were more integrated with their parent system than IJVs were. Among the IJV forms, the co-owned (50/50) mode was the most integrated while the minority IJVs were the least integrated.

Hill, Hwang and Kim (1990) examined the choices of international entry mode using an eclectic theory. They identified three underlying constructs that influence the entry mode decision, viz., control, resource commitments, and dissemination risk. The study found that firms which use a “multidomestic” strategy favor licensing or IJV as the mode of entry since these represent low-cost strategies for entering foreign markets. On the other hand, firms that pursue a truly global strategy tend to prefer a high control mode, namely, WOS. Achieving coordination within the context of an interdependent global manufacturing system necessarily requires a high degree of control over the operations of different national affiliates. Moreover, it was found that when the country risk is high, MNEs will favor IJV or licensing because they involve relative low resource commitments. Similarly, when the demand is uncertain and the volatility of competition in the host market is high, MNEs will favor entry modes that involve low resource commitments, such as licensing and IJV. On the other hand, if a firm perceives high quasi-rent generated by the firm’s proprietary knowledge, it will favor WOS in order to minimize its dissemination risk. In other words, the greater the tacit component of firm specific knowhow, the more a firm will favor a high control entry mode.

Contractor (1990) examined how a firm chooses between alternative modes of international business, ranging from contractual transfers of technology under a licensing agreement, to quasi-integration such as joint ventures, to full ownership of foreign investments. Contractor proferred a unified theory of model choice to determine which mode was optimal under specific conditions. He found that market revenue increases as MNE ownership increase. However, he also found that the transaction cost and the international cost increase as ownership increases. Transaction costs include the cost of negotiating and transferring information and capability to another firm, cost of personnel training, cost of losing the opportunity to having direct sales or getting the full amount of profit, and the threat of creating a competitor in markets beyond the purview of the agreement. Contractor found that this cost might be avoided if a firm invests in WOS. Therefore, WOS is desired when transaction costs and international costs are high. On the other hand, IJV or pure contract might be the optimal choice when the global market for technology transfer is more efficient and when transaction costs are low. Contractor also found that the WOS mode is favored if the fear of creating competition is high. In contrast, the IJV mode is favored if the market is more mature.

Gomes-Cassers (1987), analyzing data from a Harvard Multinational Enterprise data base, found that the instability rate of IJVs was higher than that of WOSs. The reason given for this was that MNEs tend to terminate some affiliates in order to adapt their ownership policies and positions as they gain experience in the foreign market and as the circumstances change or new international business opportunities arise.

Beamish (1988) measured the performance of two groups of IJVs, those operating in industrially developed countries and those in developing nations, in terms of their managerial dissatisfaction, instability and autonomy. He found that because of environmental differences between industrialized and developing countries and performance problems in the latter, JVs should be managed differently in each of the respective groups of countries.

Otterbeck (1981), on the other hand, found that in terms of certain criteria, WOSs and IJVs were significantly different. He based his study on a group of six Swedish MNEs. Data were collected from 13 WOSs and 11 IJVs. MNE ownership in the IJV units ranged from 24% to 60%. His major findings included: (1) IJVs showed lower remittance than WOSs in terms of royalty payments, license fees, and management fees; (2) WOSs were more integrated into a parent’s production system than IJVs–the proportion of input that is imported from parent is much higher in WOSs; () IJVs were significantly more leveraged than WOSs; (4) IJVs exported a higher percentage of their output to parents and other affiliates within the parent system; (5) WOSs and IJVs hardly differed in terms of the autonomy of subsidiaries; and (6) no significant difference exists between WOSs and IJVs in terms of the level of conflict in parent-subsidiary relations.

Dang (1977), relying on a sample of 16 WOSs and 11 IJVs of U.S-based MNEs in the Philippines and Taiwan, examined the relationship between ownership and performance of the subsidiaries. Dang found that WOSs did not significantly differ from IJVs in terms of profitability and productive measures. By comparing the practices of the two groups of firms, he also observed that WOSs and IJVs do not significantly differ in terms of their managerial policies toward export procurement, technology transfer, and financial control. Dang interpreted these findings in terms of a market imperfections framework, concluding that if the market structure (environment) in host counties is reasonably competitive, type of ownership has little or no independent influence on the operating characteristics and performance of foreign subsidiaries.

Finally, Franko (1971) developed criteria for determining levels of instability in JVs by examining the equity participation rates among partners. He found that an IJV became unstable when equity holdings of the parent multinational partner exceeded 50 or the participation rate in the venture exceeded 95%.


This study sought to test several major hypotheses regarding the characteristics and performance of IJV versus WOS. First, although IJV has been regarded as an optimal choice by many, prior research has not shown which of these two strategic options result in better performance for the parent corporation. Hence, our first hypothesis:

H1: Multinationals which enter foreign markets by IJV will outperform those that enter foreign markets by WOS.

The next hypothesis concerns the impact of the two strategic modes on the parent corporation’s R&D expenditure. The theory on the motivation for selecting the IJV strategy suggests that IJVs can be expected to substitute for a firm’s internal R&D activity since the parties can benefit by implementing joint R&D activities (Berg, Duncan and Friedman, 1993). The argument is that joint R&D can provide two elements of economic value to the IJV participants, that is, risk reduction and reduction in time lag for the introduction of new products. These a important issues for industries in which new products or improvements of existing products are critical to the firm’s survival. Firms with low productivity are seeking new technology from outside or attempting to find the right partner with whom to share R&D costs. On the other hand, firms with high productivity are seeking new markets to consume their technological innovations before they become obsolete, thus spreading the risk of introducing their new products. The difference in ability or difference in risk aversion can lead to an R&D substitution effect (Bowman, 1980). If this theory is true, we should observe lower R&D spending for firms which engage in IJV compared to those which engage in WOS. The second hypothesis of this paper can thus be stated as follow:

H2: Multinationals engaging in IJV have a lower R&D intensity than those engaging in WOS.

A related concern is the effect of the U.S. parent company’s R&D intensity on the performance of its IJV. It is quite common that the R&D intensity of a U.S. parent company directly affects the performance of its foreign subsidiary if the latter is a WOS. However, the R&D intensity of a U.S. parent company may exert either a positive or negative effect on the likelihood of a joint R&D operation, thus impacting the performance of the IJV. The third hypothesis is exploratory in nature and will examine whether or not the performance of an IJV will be affected by the R&D intensity of its U.S parent company.

H2(a): The R&D intensity of the U.S. parent company affects the performance of its IJV.

Finally, conventional wisdom would suggest that firms pursuing different strategies tend to exhibit different characteristics. Hence, this paper seeks to explore whether there are any meaningful differences between multinationals which engage in IJVs versus those that engage in WOSs. Such differences, if they exist, will have important implications for a firm’s strategic choices. Two important dimensions, size and degree of multinational involvement, will be examined in this study. Our final hypothesis can be stated as follows:

H3: Firms that engage in IJV are significantly different from those that engage in WOS in terms of their size and degree of multinational involvement.


Data Source and Sample

The sample for this study consisted of 50 multinationals that participated in IJV and 50 multinationals that participated in WOS. These companies were selected from the population of firms contained in the International Directory of Corporate Affiliations (1988/1989). Several criteria were used for the selection of the sample. First, if the U.S. parent owned 95-100% of a foreign affiliate, it was classified as a WOS (Chowdhury, 1992). If the U.S. parent owned between 11-94% of an affiliate, it was labeled as an IJV (Gomes-Cassers, 1989; Chowdhury, 1992).

A second criterion used was that all foreign subsidiaries of a particular MNE selected had to be engaged in either IJV or WOS. The rationale for so doing was to avoid any type of “overlapping” or “hybrid” effect. Thus, any MNE which participate in both IJV and WOS were eliminated from the study. Furthermore, this study did not subcategorize IJV ownership into majority-owned, co-owned and minority-owned because the percentage of such ownership was not available for every subsidiary except for subsidiaries that U.S. parent has 100% ownership. It is expected that the resulting sampling represented a reasonable approximation of the overall population of the targeted firms.

Financial and other data for the sample firms were obtained from the Industrial Annual Files (IA) of the COMPUSTAT data base. Information for the 1988-1991 period was gathered since the sample companies were taken from the beginning of that period.


The strategic performance of the MNEs was measured by profitability ratios and growth rate. The profitability ratios included in this study were: return on assets (ROA), return on sales (ROS), return on invested capital (ROI), return on equity (ROE), return on foreign investment (ROFI), and foreign income as a percentage of sales. Growth rate was measured by the annual growth in foreign income.

The characteristics of MNEs that engaged either in IJV or WOS were analyzed along 3 dimensions, namely, R&D intensity, firm size and the degree of multinational involvement. R&D intensity was measured by R&D expenditures as a percentage of net sales of the U.S. parent firm, size was measured by the firm’s total assets, and the degree of multinational involvement was measured by the number of foreign subsidiaries.


Hypothesis 1: Performance

Descriptive statistics, t-tests, and regression analyses were used to analyze the data. In terms of ROA and ROI, the results indicate that on average the performance of MNEs that participated in IJV was slightly below that of those which participated in WOS in most years. However, the t-tests indicate that the difference in performance was significant only for one year, that is, 1988. For other years, the differences were not significant at the 5% level.

Similar results were obtained for the ROS and ROE variables, that is, the means of these variables for MNEs participating in IJV were less than those associated with WOS. With respect to ROS, however, the differences were not significant in any year. With respect to ROE, in only one year (1990) was the performance difference found to be statistically significant.

The international performance of the two strategic modes was examined using three variables, namely, foreign income as a percentage of net sales, ROFI, and foreign income growth. The results indicate the following:

(a) the mean value of percentage of foreign income to net income for MNEs engaged in IJVs was slightly below those engaged in WOSs. Only in year 1989 did the IJVs outperform the WOSs. However, none of the differences were significant.

(b) WOSs outperformed IJVs for every year on the ROFI variable. The differences, however, were significant only in years 1988 and 1989.

(c) MNEs that engaged in LTV experienced larger negative foreign income growth than those engaged in WOS. The differences, however, were not statistically significant.

From the above evidence one can generally conclude that there was no significant difference in the performance of IJV versus WOS. Hence, H1 could not be supported.

Hypotheses 2 and 2(a): R&D Intensity

The results indicate that WOS exhibited higher R&D intensity than IJV for every year. However, since none of the values were significant, we cannot conclude that IJVs require lower R&D intensity than WOSs. Hence, hypothesis 2 could not be supported.

To test hypothesis 2(a) several regression analyses were performed. The first analysis used foreign income for the year 1988 as the dependent variable and R&D intensity for the same year is used as the independent variable. In order to accomodate the lagged effects of R&D expenditures, a second analysis was then conducted using a one year lag of R&D intensity as the independent variable. The results of both analyses indicate that R&D intensity was positively correlated with the foreign income of the MNE. This result is very strong since the coefficients were found to be significant at 1% level.

It is interesting, however, to note that the R-square of the second regression was higher than the R-square in the first equation. When foreign income was regressed against the R&D intensity of the same year, an R-square of 0.33 resulted. However, when the lagged effects of R&D were taken into consideration, the R-square doubled to 0.66. This suggests that the performance of IJV has improved as a result of past, rather than current, R&D activity of the U.S. parent company. Therefore, further analysis using the lagged variable was conducted to measure the impact of the parent company’s R&D intensity on the IJV’s performance.

The results indicate that, for the entire period examined, R&D intensity was positively correlated with the performance of the IJV. The correlations were very strong since the coefficients were significant at the 1% level for every period. Moreover, this positive relationship holds regardless of whether foreign income or net income was used as the dependent valuable. However, it is worthwhile to note that the R-square of the equation using foreign income as the dependent variable was higher than that using net income as the dependent variable for every period examined. This evidence indicates that the R&D intensity of a U.S. parent company creates a more positive effect on the performance of an IJV than it does on the overall performance of the U.S. parent company. Hence, hypothesis 2(a) was supported.

Hypothesis 3:

Size & Degree of Multinational Involvement

The results indicate that (1) MNEs that chose IJV were larger that those that chose WOS, and (2) firms which employed the IJV strategy have a significantly higher number of foreign affiliates than those that used the WOS strategy. In other words, large MNEs with high degrees of multinational involvement tended to select IJV as a strategy for entering foreign markets instead of opening up their own subsidiaries. Such evidence lends support to hypothesis 3.

DISCUSSION Performance of IJV versus WOS

When comparing the performances of firms participating in IJV to those participating in WOS, the findings in this study indicate that these two kinds of firms are not significantly different from each other. Furthermore, in our particular sample, the data reveal that the WOS strategy was actually more profitable than the IJV strategy from the perspective of the U.S. parent company. These two findings suggest that the IJV strategy might equally perform or even underperform the WOS strategy. Such evidence tends to contradict standing theory which argues that because of the tremendous advantages that IJV has to offer to multinationals, it is the most appropriate strategy for entering foreign markets (Lei, 1989). The possible reasons for such contradiction are offered below.

The first explanation why an IJV might not outperform a WOS is that the implementation of the former strategy may be problematic. The principal drawback of an IJV, as attested by many of the world’s business leaders and managers, is the artificial and uneasy atmosphere created by trying to combine the resources and the management approaches of two separate companies in one enterprise. In an IJV, two management teams with different nationalities, backgrounds, experiences, abilities, and perhaps objectives, are asked to cooperate, to pursue a common goal, to agree on common means and to work under the same authority. These factors might create problems in the day-to-day operation and the future planning for the joint venture, thus creating an adverse effect on the performance of the IJV as well as the U.S. parent company. This kind of problem can be avoided if the multinational enters a foreign market via WOS since it will have full control over its foreign subsidiary. However, this is not to suggest that a firm should not consider IJV as a viable strategy for entering new markets, only that it should remain cognizant of the inherent and potential difficulties involved in implementing the IJV. In spite of these difficulties, managers would be wearing blinders if they were to ignore the opportunities presented by interfirm cooperation. If the innovative capabilities of corporations could be greatly enhanced by IJV, potential negative impacts are likely to be balanced or even outweighed. If partners share objectives and trust in advance, and carefully negotiate ownership and management requirements, then the IJV can survive and prosper.

Second, although the data in this study indicate that the profitability ratios for IJV are, on average, lower than those for WOS, it does not imply that the IJV strategy will not work. One possible explanation for the results is that most MNEs tend to use IJVs when they first enter a foreign market and most of them succeed by using this strategy. However, many MNEs also tend to terminate their IJV operation as they gain greater experience in their foreign market or as they obtain a stable position in the host countries (Chowdhury, 1992). A large U.S. MNE with a strong financial position and strong technological base may attempt to expand through a venture and acquire a large proportion of ownership; on the other hand, the small local partner with limited resources may not have the ability to maintain its position in that venture. Thus, the IJV may eventually become a majority-owned arrangement or even change its status to WOS. Therefore, the existing IJVs may not show better performance than WOSs since most of the successful IJVs may have been terminated by the U.S. parent companies. This evidence leads to the conclusion that an IJV may be a good strategy for first entering a foreign market, especially when the commercial risks and country risks are high. However, in the longer term, MNEs may prefer to terminate its IJV or change the ownership status to WOS in order to gain full control over the foreign venture, or more importantly, full profit from the operation.

Finally, due to limitations in data gathering, the performance comparison in this paper has been conducted on the basis of the U.S. parent company rather than the particular IJV or WOS in the foreign country. It should be noted that profits generated by IJVs may not go back directly to the U.S. parent companies as they do in the case of WOSs, especially in the short run. IJVs have to share the profit with local partners as well as reinvest the revenues for future expansion purposes. This provides another explanation why the profitability ratios of MNEs using IJVs may be lower than those using WOS when comparing only the U.S. parent companies.

R&D Intensity

This study showed that the R&D intensity of a U.S. parent company exerts a positive impact on the performance on its IJV. Based on this, one may infer that the performance of an IJV would depend upon the willingness of the U.S parent to contribute its technical knowhow and resources. If the U.S. partner possesses important technical skills or resources and contributes them to the joint venture, it may reap higher profits from that venture.

In certain situations, however, it is possible that an MNE may choose not to transfer its knowhow to the IJV and act to discourage joint R&D (Hladik, 1985). This is especially true for a U.S. firm that pursues a highly innovative strategy in its industry. The firm can be both highly efficient in its R&D efforts and protective about the technical knowhow that gives it a competitive edge. As an efficient producer of innovative output, the firm might find it more profitable to conduct R&D itself and license the R&D to the JV. The reason for this is that the firm might fear the leakage of technical secrets since a strong foreign partner could use this technology for its own competitive advantage and perhaps create a future detriment to the U.S. parent firm. Many multinationals may therefore hesitate to become involved in collaborative R&D because of such risk.

Multinational Involvement

It was found that firms that engaged in IJVs tended to be larger than those that engaged in WOSs. One plausible explanation for this is that a large company which pursues a “multidomestic” strategy is often more likely to use an IJV strategy because of the belief that national markets differ widely with regard to consumer tastes and preferences, competitive conditions, operating conditions, and political, legal, and social structures. Maximizing firm’s efficiency in such circumstances requires that MNEs assign key operating and strategic responsibilities to national subsidiaries (Hill, Hwang and Kim, 1990). IJV, thus, is the most appropriate entry strategy since it creates more flexibility for adapting the operation to meet the requirements under different competitive conditions.

In addition, the results indicate that a firm which has a high degree of multinational involvement tended to select IJV instead of WOS. This may be because the management philosophy of large multinational firms is premised upon holding an efficient portfolio of investment. The majority of such firms prefer to enter new foreign markets by IJV with a foreign partner since this incurs lower cost and lower resource commitment compared to WOS. These advantages provide the firm with greater opportunity to spread its operation out to many different countries rather than get tied down to a big investment in one country or one venture. A multinational may gain competitive advantage by having an efficient portfolio in many foreign markets, thereby spreading out the country risk as well as commercial risk. The findings in this study are supported by previous research which have found that firms following diversification strategies are more likely to enter a foreign market by IJV than WOS (Caves and Mehra, 1986).


In the midst of continuing controversy over the correct choice of international entry strategies, this study provides empirical evidence to show that there are no significant differences in the performance of IJVs versus WOSs. While this finding does not refute the inherent and potential benefits of IJV, as many researchers have shown, firms choosing the IJV strategic option should be fully aware of potential problems involved in its implementation. If IJV partners share objectives and trust in advance, and carefully negotiate ownership and management requirements, then the IJV will have a good chance to survive and prosper.

Another important lesson derived from this study is that IJV may not totally subsitute for the internal R&D activity of the U.S. parent firm. The reason is that many multinationals are inclined toward conducting R&D activities by themselves regardless of whether they enter foreign markets by IJV or WOS. Although an IJV has considerable appeal because it allows for the sharing of risk and cost of R&D, it can constrain the company’s future strategy if the venture involves a leakage of either proprietary knowledge or some critical corporate core skill. This issue becomes paramount especially for those MNEs whose global competitive advantages stem from high-technology. The subject of IJV commands top management’s full attention since it involves revealing the company’s key ingredients for its long-term competitiveness to a potential future competitor. Therefore, firms embracing the IJV strategy should be fully cognizant of the difficulties involved in retaining proprietary technologies and core skills.

Finally, this study has shown that firms that engaged in IJV tended to be larger and have a greater number of foreign subsidiaries than those that followed the WOS strategy. The implication here is that large multinationals tend to embrace the philosophy of diversification. They tend to choose IJV as a means of holding an efficient portfolio of investment. The underlying premise is that if the firm could gain competitive advantages by entering a foreign market via IJV, it will have enough resources to diversify its operations into many countries rather than invest fully in one or a few subsidiaries.

In conclusion, this paper has shed further light on two of the most viable global strategies. While some of the findings here might contradict the arguments presented by previous research which advocate the blind use of IJV, this paper is intended to enrich rather than replace existing explanations of the choice of entry mode. In addition, this study suffers from data gathering limitations. Because of these limitations, the analysis has been focused on the performance of U.S. parent companies. A useful suggestion for future research is to examine the performance of a particular IJV and WOS operating in a foreign country. Such an investigation should further enrich our understanding of this all important area.


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Copyright College of Business Administration. University of Detroit Mercy Spring 1995

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