International joint ventures (IJVs) refer to organizations that are newly created and jointly managed by two or more parent firms headquartered in different countries in the quest for common goals, such as synergy and complementarity, that cannot be accomplished by each alone. The fact that all the parent firms involved ought to inject initial capital, resources, and capabilities into the new organization for achieving the common goals forges not just a mutual destiny, but a collaboration imperative. This collaboration imperative induces the parent firms to exert coordinative efforts when organizing their IJVs’ business activities to pool, share, and combine resources and capabilities, such as knowledge and technologies, offered by the parent firms. Given that innovation develops as a result of the “recombinatory search” or “mixing and matching” [1
], it is not surprising that IJVs have grown to prominence as an organizational method for technological innovation through these activities of pooling, sharing, and combining of different technologies [7
However, it is not easy to effectively organize the activities of pooling, sharing, and combining different knowledge in IJVs due in large part to their shared management and control over decision-making between local and foreign parent firms [11
]. Any organizing efforts to develop innovation in IJVs, therefore, call for well-crafted control arrangements that bolster the collaboration imperative and keep in check the divergent interests of the parent firms [14
]. Even so, there is a paucity of studies exploring the optimal control structure of IJVs to enhance their innovation output (see [10
]). We seek to fill this void by linking IJV control structure [12
] to three interrelated theoretical conceptions that arguably determine the efficacy of the innovation process of IJVs: local embeddedness [15
], the liability of outsidership [16
], and open innovation [18
A growing body of literature on open innovation demonstrates that the locus of innovation does not reside so much inside the firm as outside the organizational boundary, underscoring the importance of the external sources of innovation [18
]. Implicit in this research stream is a presumption that potentially useful knowledge to an organization is chiefly dispersed outside the organization, rendering it indispensable to stay on the lookout for external knowledge and manage its inflows [20
]. As the innovative process involves not merely generating new ideas, but also putting them to a commercial use [21
], external knowledge for innovation comes both from upstream research and development (R&D) activities and from downstream manufacturing and marketing activities along the value chain [18
]. So, the question of how best to manage inflows of external knowledge for innovation arguably boils down to the question of how best to manage relations with exchange partners along the value chain [22
Foreign parent firms, however, are at a serious disadvantage in establishing and managing relations with exchange partners along the local market value chain in part because they are not accustomed to the taken-for-granted rules of social interactions or institutions, such as norms, customs, traditions, and conventions in the local market environment [27
], and in part because they are not yet known to local market players as reliable exchange partners [29
]. Relational disadvantage of this sort confronting foreign parent firms in the local market is well summarized by the liability of outsidership (this conception has a close bearing on “the liability of unconnectedness” in social network literature [32
]; understood as a disadvantage from being located outside a relevant network, the liability of outsidership puts an added emphasis on the role of locally embedded relations in alleviating the liability of foreignness that foreign firms typically suffer in the local market when starting business [16
]), the concept introduced by Johanson and Vahlne [16
]. Defined as costs of being located outside a relevant network in the local market, the liability of outsidership conceptualizes the business environment as networks of exchange partners through which to create knowledge and learn, highlighting the primacy of managing the networks in internationalization. Consequently, foreign parent firms will fail to adequately secure the main sources of external knowledge and, therefore, suffer a substantial shrinkage in knowledge inflows [34
]. Echoing this viewpoint, Andersson and colleagues argue that “IJVs should be locally embedded in the ongoing relations with suppliers, buyers, consumers, and even government bodies to improve knowledge creation and local innovation” (2005, p. 526).
Foreign parent firms may wish to bring the embedded relations from their home countries as external sources of knowledge to bear on this liability of outsidership. So, this attempt is deemed a kind of substitution strategy. However, doing so seems fruitless owing to geographical distance limiting intimate social interactions for knowledge transfer. Geographical proximity is reported to facilitate innovation by expediting face-to-face interactions [35
], in which information transfer is most enriched enough to transpose and migrate even tacit knowledge [36
]. Despite the development of information and communications technology, the depth and breadth of information transferred through face-to-face interactions are unrivaled by those of information conveyed through online media. In line with this, research shows that there is a strong tendency to collaborate with geographically proximate players [37
]. It follows that taking advantage of far-flung firms in their home countries as sources of external knowledge may not be very helpful in enhancing the innovation rate of IJVs [34
The only option left for foreign parent firms may be to turn to their local partner firms. Local firms are an invaluable complementary asset to foreign parent firms, as they are already deeply embedded in networks of various market agents in the local market or a sort of innovation infrastructure [15
]. Hence, it seems ideal for foreign parent firms to count on their local partners. Nonetheless, the extent to which foreign parent firms can get access to and find support from the local networks of their local partners arguably varies according to the way control apparatuses are built in their IJVs.
We examine this variance by considering two facets of IJV control: foreign managerial control [12
] and equity ownership balance [10
]. Because managerial control and equity ownership alike represent the right to intervene in the decision-making process about formulating and implementing proposals for resource utilization [40
], both influence innovation development processes [21
]. In view of the relational disadvantage foreign parent firms suffer in the local market [15
], we argue that managerial control by foreign parent firms will hurt IJV innovation and that equity ownership balance will alleviate this effect since local parent firms, under balanced ownership, get to have incentives to assist the troubled foreign partners using their embedded relations in the local market. We also allow for two additional factors that are thought to alter the capability of foreign parent firms to develop innovation: IJV tenure and business group affiliation.
We test these hypotheses using panel data of 48 IJVs in Korea during the period between 2000 and 2016. Consistently with our expectations, we find that managerial control by foreign parent firms decreases innovation. We also find that this negative effect of foreign managerial control is alleviated when there is an ownership balance between foreign and local parent firms and when IJVs are affiliated with business groups operating in the local market.
The remainder of the paper is organized as follows. In the next section, we develop the theory and hypotheses. Subsequently, we offer details about our data and methods and conduct an empirical analysis. Then, we report the results. Finally, we discuss the implications of the findings and conclude by distilling the theoretical and practical insights that emerged from this study.
provides the descriptive statistics and correlation matrix for the variables used in our analysis. According to the results, the number of successful (or granted) patent applications per year of IJVs, our dependent variable, is two. Only about 28% of foreigners were appointed as CEOs, suggesting that IJVs generally favor local CEOs. On the other hand, that ownership balance, whose maximum value is 0.5, was over 0.38 indicates that equity distribution between foreign and local firms is more or less symmetric. Since some of the correlation coefficients were higher than 0.4, we computed variance inflation factors (VIFs) in all models. The largest VIF was 6.43 in the full model, with all the mean VIFs below 2.5 in all models. Thus, the results are relatively safe from the multicollinearity concern.
presents the random-effects panel negative binomial estimates. Model 1 is the baseline model that includes only control variables. Consistently with conventional wisdom, R&D intensity increases innovation. Moreover, industry concentration is negatively associated with innovation (p
< 0.05), confirming the view that competition drives firms to innovate [105
]. Interestingly, ownership balance has a negative influence on innovation, which is consistent with some studies that highlighted a negative impact of shared control on IJV performance (e.g., [12
]). Model 2 inserts foreign managerial control, our focal variable. According to the result, foreign managerial control is negatively associated with innovation (β = −1.404, p
< 0.05). Practically, this means that if foreign parent firms take managerial control, the innovation output of their IJVs decreases by 75.4% (=100*
than if local parent firms take managerial control. Thus, we find support for Hypothesis 1.
In models 3 to 6, we insert the interaction terms with moderating variables. In model 3, we insert the interaction term with ownership balance. The result indicates that ownership balance positively moderates the negative relationship between foreign managerial control and innovation, lending support to Hypothesis 2a (β = 12.788, p
< 0.05). In model 4, we add the interaction term with IJV tenure. The coefficient for the interaction term is insignificant. So, we find no support for Hypothesis 2b. In model 5, we introduce the interaction term with business group affiliation. Consistently with our expectation, business group affiliation alleviates the negative effect of foreign managerial control on innovation (β = 3.514, p
< 0.05). Thus, we find support for Hypothesis 2c. In model 6, we insert all the interaction terms into the baseline model at once. While we find continued support for the interaction with business group affiliation, the effects of other variables turn insignificant. This finding is partly attributable to inherently excessive correlations among interaction terms that partial one another out [121
For a more intuitive understanding of these results and to take into account the non-linear nature of negative binomial regression models, we offer interaction graphs in Figure 1
and Figure 2
(we used mean values for control variables and values one standard deviation above and below the mean for all the independent and interacting variables, except business group affiliation, for which we used 0 (i.e., non-affiliated) and 1 (i.e., affiliated) instead.). Figure 1
displays the interaction effect of ownership balance on the relationship between foreign managerial control and innovation. When equity ownership is imbalanced between foreign and local parent firms, IJVs managed by foreign parent firms (0.1 successful patent applications per year) are inferior to those managed by local parent firms (1.1 successful patent applications per year). However, if equity ownership strikes a balance, IJVs managed by foreign parent firms (1.5 successful patent applications per year) become superior to those managed by local parent firms (0.6 successful patent applications per year). Figure 2
displays an interaction effect of business group affiliation. When independent, IJVs managed by local parent firms (0.09 successful patent applications per year) are better performing than those managed by foreign parent firms (0.01 successful patent applications per year). When affiliated with business groups, IJVs managed by foreign parent firms (0.04 successful patent applications per year) become superior to those managed by local parent firms (0.01 successful patent applications per year). All these results lend consistent support to our theory.
5. Discussion and Conclusions
In this study, we explored the optimal control structure of IJVs for developing innovation. We also examined how several IJV attributes alter the optimal control structure. Drawing on the conceptions of local embeddedness [123
], the liability of outsidership [16
], and open innovation [19
], we argued that foreign managerial control suppresses the ability of IJVs to access the local networks for innovation—a local innovation platform—resulting in a lowered innovation output of IJVs. We argued and found evidence that this negative effect of foreign managerial control on innovation weakens with ownership balance and business group affiliation. These findings offer both theoretical and practical insights.
Our theory draws attention to the heterogeneity in capabilities to develop innovation between local and foreign parent firms. Admittedly the innovation development process calls for internal efforts to process R&D inputs into innovative outcomes. However, such internal efforts are by no means sufficient. It also necessitates the management of external knowledge inflows from the buyers/suppliers along the vertical value chain [24
] as well as ongoing horizontal relations with various constituencies in the local organizational field [15
]. However, foreign parent firms are typically less capable of managing the external knowledge inflows in part because they have yet to secure acceptance from the local players as reliable exchange partners that could uphold such close relationships [125
]. Viewed through the lens of open innovation, this finding indicates that foreign managerial control hampers the ability of IJVs to reap the benefit of open innovation. Consequently, IJVs may need to rely on local managers at least for a while to encourage themselves to open up their innovation processes to external innovative players on the market [128
In stark contrast, local parent firms are equipped with all that foreign parent firms lack. Hence, our finding offers insights into the extent to which roles could be delegated to local parent firms as far as innovation development is concerned [131
]. Even in the case where local parent firms do not have state-of-the-art technology in comparison with foreign parent firms, they should not remain as mere bystanders in the innovation process. Instead, they should assume a vital role in developing innovation by helping locate quality local firms to collaborate with and by alleviating uncertainty stemming from their lesser-known foreign partner firms. This finding, thus, implies that the successful development of innovation hinges upon a well-executed division of labor, coordination, and cooperation between local and foreign parent firms [132
Relatedly, our study also points to the way such division of labor is effectively administered. According to our results, the negative effect of foreign managerial control on innovation decreases when ownership is balanced. This result implies that although foreign parent firms are in trouble, local parent firms may not have many incentives to help their foreign partners out if their ownership stake is marginal. Hence, foreign parent firms should cede more equity stake to their local partner firms than initially conceived because they may have to ask for more help later on in the innovation development process, particularly as regards locally embedded relations.
We find that the negative relation between foreign managerial control and innovation does not subside as IJVs mature. Our initial expectation was that foreign parent firms could successfully accumulate knowledge about how to establish and maintain embedded relations with local market players as they practice learning by doing and learning by observation over time and become used to the rules of social interactions. Simply put, we expected that the liability of outsidership would decrease over time. Contrary to our expectation, our finding indicates that such learning may not be completed quickly, such as within a decade or so, painting a grim picture of IJVs’ ability to adapt to different institutional environments; that is, it may take a considerable amount of time for foreign parent firms to get themselves locally embedded and alleviate the liability of outsidership. From a slightly different angle, this finding predicts the long-run stability of IJVs when foreign parent firms take managerial control and give top priority to innovation because their dependence on the local parent firms will persist [133
Our finding also suggests that business groups and inter-affiliate relations therein can functionally substitute for locally embedded relations. Defined as “sets of legally separate firms bound together in persistent formal and/or informal ways” ([87
], p. 429), business groups are de facto a single entity sharing identity and destiny as well as fostering strong solidarity [87
]. Therefore, their inter-affiliate relations are much stronger and more effective in transferring knowledge than the relations found in the market [93
]. So viewed, our finding recommends foreign firms aimed at establishing an IJV to look for local partners affiliated with business groups, especially if their primary objective is innovation.
Our finding also offers an implication for policymakers. Given that foreign managerial control can reduce innovation output, policymakers may need to contemplate a regulation that prohibits foreign managerial control up to a certain point at which foreign managers sufficiently address the liability of foreignness and outsidership and the lack of local embeddedness. This point becomes all the more germane to the economic society in that innovation not only contributes to an individual organization’s sustainability [1
] but also improves the sustainability of the economic society as a whole by improving social welfare on the basis of the spillover effects [135
To conclude, this study furthers our understanding by offering insights into how to design IJVs for maximizing innovation output, with an added emphasis on the control structure of IJVs.
6. Limitations and Future Research
As with all studies, our study has some limitations that may provide directions for future research. First, this study assumes that foreign firms take managerial control over their IJVs when they take up the CEO position. Granted, the roles, responsibilities, and influence of CEOs cannot be over-emphasized in the analysis of management in general and strategic choices in particular [136
]. Even so, it is also true that what CEOs do for an organization performs just one functional part of all the managerial activities. In line with this reasoning, the role of middle managers as agents for channeling communication has attracted considerable scholarly attention in a variety of managerial topics (e.g., [138
]). Future studies should continue to allow for control through various managerial layers other than through the top management in understanding the effect of foreign managerial control on the innovative performance of IJVs (cf. [140
Furthermore, this study does not take alliance history into account [30
]. Network literature has revealed that repeated interactions engender inter-firm trust [30
] and “pressures for conformity to expectations” ([142
], p. 63). Then, the analysis of the control structure to the exclusion of alliance history may overestimate the effect sizes of the purely economics-based explanation [63
]. Relatedly, this study does not take into account other types of embeddedness, such as positional and structural embeddedness [31
]. Future studies may benefit from considering the effects of these factors of networks.
Although this study measured innovative performance based on successful patent applications, there are alternative ways to measure it (e.g., [10
]). For instance, the number of patent applications can be used instead, regardless of whether they are eventually granted. However, research evidence suggests that the number of successful patent applications and that of patent applications are practically the same, on the grounds that most applications are ultimately granted, with the grant rate being in the neighborhood of 90% [143
]. Furthermore, even if it takes 28 months on average for a patent application to be granted [144
], quality inventions tend to be granted much quicker. From a slightly different angle, it would be of value to attend to the quality of innovative outputs by using the number of citations [5
Finally, our study is based on a single-country data sample. The advantage of such a single country setting is that it does not create the need for controlling for heterogeneous institutional settings, which are typically challenging to operationalize. The disadvantage, however, is that the results derived from such a single country study unavoidably suffer from limited generalizability. So, we believe that further investigation into other countries holds promise for enriching our knowledge.