Effectiveness of dyadic and multi-party joint ventures

Abstract

Using data from 80 joint-venture (JV) experiences, this article compares the influence on JV effectiveness of two alternative ways of management: relational investment and formal control. Our results show that the adoption of one or another is contingent upon the number of partners: while relational investment significantly influences the effectiveness of dyadic JVs, formal control is pivotal in the case of multi-party JYs.

Keywords: dyadic and multi-party joint ventures, joint-venture effectiveness, formal control, relational investments

Introduction

The number of partners participating in an alliance represents a dimension of complexity (Killing 1988) that may affect its effectiveness, that is, the extent to which a focal partner's goals for the alliance are fulfilled. While this is well acknowledged, the differences between dyadic and multi-party alliances have been largely ignored. Thus, most studies have focused on dyadic alliances, and they are content to suggest that the same argument that applies here could be easily extended to multi-party alliances. The effects brought about by the number of partners within an alliance have been examined only in a few articles, most of them having to do with the literature on alliance governance. In this sense, Gulati (1995a), Garcia-Canal (1996) and Oxley (1997) argue that multi-party alliances are more difficult to govern than dyadic alliances, and, for this reason, joint ventures (JVs) tend to be adopted more frequently in the multi-party case. Among those dealing with JV duration and performance, only Park an d Russo (1996) have been concerned with the analysis of the effect linked to the number of partners. In particular, they predicted a higher rate of failure in multi-party JVs, indicating that the management of multi-party JVs may be more complex than that of dyadic ones. Nonetheless, the causes and consequences of this complexity remain unexplored.

Precisely, this is the issue addressed in this article. We argue that the number of partners conditions the appropriate management approach adopted in YVs. Following Madhok (1995), two different ways of managing JVs have been considered: formal control and relationship development. The former revolves around the degree of influence and monitoring needed to manage the JV in order to ensure the accomplishment of the expected goals. In turn, the latter, relationship development, is aimed at improving relational quality and trust levels in order to favour the fulfilment of the potential synergies of the alliance. Looking at the literature on alliance management, one soon realizes that relationship development is generally regarded as more effective than formal control (Beamish 1988; Dyer and Singh 1998). However, we maintain that relationship development becomes very difficult to implement in the multiparty case, because there are fewer incentives in this case for making the relation-specific investments needed f or trust building. And, it is essentially this characteristic that makes formal control the most appropriate way of managing multi-party JVs. In dyadic JVs, on the contrary, the greater possibilities for developing the relationship favour investment in relational assets, which at the same time helps to structure the N as a self-enforcing agreement. In this way, trust building encapsulates an adequate management approach for dyadic JVs. The existence of these two alternative paths to N effectiveness in dyadic and multi-party JVs has been tested using data from a sample of 80 N experiences of Spanish firms.

The article is organized as follows. The first section outlines the two main ways of managing JVs effectively. Then there is an analysis of the applicability of these alternative approaches to achieve JV effectiveness in the case of dyadic and multi-party Ns. Next, our hypotheses are empirically tested using data from a survey on the effectiveness of Ns. Given the categorical and hierarchical nature of the dependent variable, several ordered probit models were estimated to test the hypotheses. After a discussion of the results, we present the main conclusions obtained.

Paths to JV Effectiveness

Two or more companies engage in a JV (a legally independent company jointly owned by them) when they expect the potential value derived from it to be greater than the value derived from any alternative organizational arrangement. But rather than on the potential value, we focus on the realized value, understood as effectiveness. Typically, the realized value will be lower than the potential value (Madhok and Tallman 1998). This point is confirmed by the dramatic failure rates found in the literature on JV performance (see Gulati (1998) and Park and Ungson (2001) for a review). These failure rates could he a consequence of conflicting interests, of operational asymmetries, of poor coordination of the activities that would make it difficult for the firm to accomplish the full potential of the JV (Madhok 1995), or simply a consequence of environmental changes. As each partner is a sovereign organization and has its own routines and procedures, the activities of the venture involve more risk than when they are pe rformed by a single organization (Das and Teng 2001). The decision to focus our analysis on effectiveness springs from the fact that the high failure rates that are reported in the N performance literature are nearly always caused by the inappropriate management of the alliance (Madhok and Tallman 1998).