The joint-venture paradox: parent-firm characteristics, social cues, and joint venture performance

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Date

2005

Authors

Stern, Ithai

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Abstract

A popular belief in both academic and business quarters is that joint ventures (JVs) are inherently unstable and short lived. This study questions this premise by arguing that the high failure rate of JVs observed in prior studies is in part an outcome of a selection process, in which, paradoxically, out of all possible JVs, the ones that are most likely to be formed are also the ones that are most likely to fail. That happens, I argue, because some of the same factors that increase a firm’s likelihood of joint venturing may actually decrease JV performance. Specifically, drawing on the resourcebased-view of the firm, transaction cost economies, industrial organization economics, and institutional theory, I develop the hypothesis that in technology-intensive industries, where the range of technical know-how needed to stay abreast of rapidly changing developments exceeds the capabilities of any single firm, a potential partner’s age, size, prior success, along with the number of JVs previously created in a firm’s environment increase its propensity to joint venture but decrease its ability to do so successfully. That happens, I argue, because in selecting partners, executives seek readily available markers of legitimacy and capability, which unintentionally steer them to inertial partners that do not adapt well, a vital attribute of new ventures in rapidly changing, technology-intensive industries. In contrast to prior research, which has focused either on factors that influence a firm’s likelihood of joint venturing or on factors that affect JV performance, but not on both simultaneously, I develop a two-stage model, in which I first examine factors affecting a JV’s likelihood of being formed. Then, using a Heckman procedure (Heckman, 1979), I incorporate estimates of parameters from the first model into a second model, in which I use event history analysis to predict JV performance. Data on JVs created in twenty-six technology-intensive industries by publicly traded firms in the United States between 1986 and 2001 strongly supports the study’s premise that paradox exists in JV formation process, in which executives are drawn to partners that lack the flexibility needed to sustain a new venture.

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