Managerial Choice between Equity Joint Ventures and Contractual Joint Ventures in China: A Critical Test of Transaction
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Managerial Choice between Equity Joint Ventures and Contractual Joint Ventures in China: A Critical Test of Transaction Cost Economics and Resource-Based View Yue Wang School of Strategy and Entrepreneurship, University of New South Wales, Sydney 2052, Australia. E-mail: [email protected]
Despite substantial research on foreign direct investment (FDI) in China, there have been few empirical studies on the strategic choice between the two major joint venture (JVs) types, equity joint ventures (EJVs) and contractual joint ventures (CJVs). This paper provides an in-depth analysis of the managerial choice between these two strategies. It also provides a critical test of two main theories, transaction cost economics (TCE) and resource-based view (RBV), in explaining the choice. Data from structured interviews with 55 Sino–Hong Kong JVs in Guangdong province showed that the choice of CJVs over EJVs largely mirrored transaction cost-saving rationale from both Hong Kong and Chinese perspectives. When choosing EJVs over CJVs, there was a larger variety of considerations between Hong Kong and Guangdong partners, and TCE and RBV intertwined in providing insights. The paper shows that transaction costs in setting up and running EJVs vs CJVs are dependent on firm-specific capabilities to negotiate and manage equity or non-equity-based alliance partnerships. While some Hong Kong and Chinese firms chose CJVs to exploit the contracting flexibility allowed in CJV non-equity alliances, others chose EJVs to avoid the same contract attribute, due to lack of ability to manage a flexible partnership. Asian Business & Management (2007) 6, 355–375. doi:10.1057/palgrave.abm.9200235 Keywords: equity joint ventures; contractual joint ventures; China; transaction cost economics; resource-based view
Introduction Since the People’s Republic of China opened its doors to foreign direct investment (FDI) in 1979, there have been two main forms of alliance strategy available to foreign investors: equity joint ventures (EJVs) and contractual joint ventures (CJVs). Yet despite substantial research on FDI in China, there Received 22 March 2006; revised 10 July 2006; accepted 24 July 2007
Yue Wang Managerial Choice between Equity Joint Ventures and Contractual Joint Ventures in China
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have been few empirical studies on the strategic choice between the two. This paper aims to fill the gap by examining the managerial choice between EJVs and CJVs in China, while providing a critical test of two major alternative theories in explaining such a choice. While the geographic and industrial distributions of EJVs in China vary substantially, the overwhelming majority of CJVs have been concentrated in export-oriented labour-intensive industries and formed mainly between Hong Kong manufacturing firms and township and village enterprises (TVEs) in Guangdong, the South China province adjoining Hong Kong (Pomfret, 1991; Wang, 2006). From the early 1980s, Hong Kong manufacturing firms started to relocate production and assembling activities to Guangdong, which l
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