Equity Joint Ventures and the Theory of the Multinational Enterprise
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Joint venturesare the dominantformof businessorganizationfor multinational enterprisesin the developing countries(Vaupel and Curhan 1973), and are frequentlybeing used by Fortune 500 companiesin the developed countries (Janger1980;Harrigan1985). In fact,for U.S.-basedcompanies,all cooperative arrangements(involvingsuchthingsas licencesor local shareholders)outnumber wholly owned subsidiariesby a ratioof 4 to 1 (Contractorand Lorange1987). MNEs often preferjoint venturesover wholly owned subsidiariesregardless of whetheror not they are requiredby a host countryas a conditionof entry (Beamish 1984). Nevertheless,fairly limited considerationhas been given to the rationaleforequityjoint venturesin thetheoryof themultinationalenterprise. While recenttheoreticalcontributionsutilizingthe internalizationapproachhave significantlyadvancedour understandingof MNEs (Buckleyand Casson 1976; Casson, 1979, 1982; Rugman1979), the theoryoffersonly partialexplanations of the ownershippreferencesof MNEs for otherthanwholly owned subsidiaries (Davidson and McFetridge1985; Teece 1985; Thorelli 1986; Horstmannand Markussen1986; Wells 1973). The purposeof this paperis to furtherextend theinternalizationapproachby providinganeconomicrationaleforjoint ventures * PaulW. Beamishis AssistantProfessor of BusinessPolicyandInternational Business at the Universityof WesternOntario.He receivedhis Ph.D. degreein Business Administration fromWestern,andwas winnerof the BarryM. RichmanDissertation Awardin International Management fortheAcademyof Management (1986). ** JohnC. Banksis AssistantProfessorof BusinessPolicyandInternational Business atWilfridLaurier inWaterloo,Ontarioanda Ph.D.candidate University inInternational BusinessatYorkUniversity (Canada). Received:November1985;Revised:August& November1986;Accepted:December1986.
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BUSINESS JOURNALOFINTERNATIONAL STUDIES,SUMMER1987
withintheframework cost paradigm.1 In thenext providedby thetransactions section,themainfeaturesof internalization theoryarereviewed.Thisis followed by a discussionof how the theorycan be extendedto joint venturesusing cost paradigmdevelopedby Williamson(1975). In the final the transactions sectionempiricalevidencesupporting someof thepredictions of thisexpanded notionof internalization theorywillbe examined. THETHEORYOF INTERNALIZATION
Internalization theorywasdevelopedto providean economicrationaleforthe existenceof MNEs.By definitionthesefirmsestablishlocal operationsas a meansofservinga foreignmarketratherthanengaging in arms-length transactions withmarketintermediaries. Thetheorypositsthatdueto the transaction costs whichmustbe borneas a resultof conductingbusinessin imperfectmarkets it is moreefficient(lessexpensive)forthefirmto useinternalstructures rather thanmarketintermediaries to servea foreignmarket.Accordingto Williamson's (1975) reasoningthese marketimperfections arisefrom two environmental condition
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