Using data on more than 200 foreign entries made by Dutch MNEs between 1995 and 2003, this study examines the relative performance of jointly-owned and wholly-owned affiliates and sheds light on the underlying reasons why these two types of affiliates exit. By employing performance measures such as average longevity and exit rate, and by differentiating between exits through liquidations and those through sell-offs, I find that there are no essential performance differences between WOSs and JVs, which is in line with the results of prior scholarship (e.g. Dang, 1977; Chowdhury, 1992; Chan, 1995; Mata & Portugal, 2000; Pangarkar & Lim; 2003; Delios & Beamish, 2004). Furthermore, the findings reveal that both WOSs and JVs mainly exit voluntarily. The most prevalent reason for WOS exit is strategic restructuring, whereas the most common reason for JV exit is fierce competition in the host market. Finally, I discover supporting evidence for the proposition that MNE parents are more likely to buy out local partners from JVs over which they have majority ownership than from JVs over which they have minority ownership.
Table of Contents
1. Introduction
2. Literature Review
2.1 Introduction
2.2 Advantages and Disadvantages of WOSs and JVs
2.2.1 Advantages of WOSs
2.2.2 Disadvantages of WOSs
2.2.3 Advantages of JVs
2.2.4 Disadvantages of JVs
2.3 Theoretical Arguments and Empirical Findings concerning WOS and JV Performance
2.3.1 Introduction
2.3.2 JVs outperform WOSs
2.3.3 WOSs outperform JVs
2.3.4 WOSs and JVs perform equally well
2.3.5 Summary
2.4 Reasons for the Exit of Foreign Subsidiaries
2.4.1 Introduction
2.4.2 Forced Exits
2.4.3 Voluntary Exits
2.4.4 Summary
3. Propositions
3.1 Introduction
3.2 Average Longevity and Exit Rate
3.3 Exits through Sell-offs and Exits through Liquidations
3.4 Reasons for Exits
3.5 Changes in Ownership Structure
4. Methodology
4.1 Introduction
4.2 Original Sample
4.3 Data Collection and Final Sample
4.4 Performance Measures used to test Propositions 1a through 2b
4.5 Testing Propositions 3a, 3b, and 4
5. Results
5.1 Introduction
5.2 Average Longevity and Exit Rate
5.3 Exits through Sell-offs and Exits through Liquidations
5.4 Reasons for Exits
5.5 Changes in Ownership Structure
6. Conclusion
6.1 Introduction
6.2 Discussion and Conclusion
6.3 Managerial and Academic Implications
6.4 Limitations and Suggestions for Further Research
Research Objectives and Focus
This study investigates the relative performance of jointly-owned and wholly-owned foreign subsidiaries established by Dutch multinational enterprises between 1995 and 2003, while identifying the underlying reasons for their exit. The research aims to clarify whether different ownership modes perform differently in the long term and whether motives for exit vary systematically between these structures.
- Comparative analysis of average longevity and exit rates between joint ventures and wholly-owned subsidiaries.
- Differentiation between voluntary exits (e.g., strategic restructuring) and forced exits (e.g., poor performance).
- Examination of ownership structure transitions, specifically the conversion of joint ventures into wholly-owned subsidiaries.
- Evaluation of the influence of host market environment and partner characteristics on subsidiary performance and survival.
Excerpt from the Book
2.4.2 Forced Exits
One of the first scholars to investigate reasons for exits was Torneden (1975). By looking at foreign disinvestment made by U.S. MNEs, he pointed out one reason that can be ascribed to forced exit, namely political instability in the host market. In the overarching study of Duhaime & Grant (1984), poor affiliate performance was a central motive in the company’s exit process. The authors offered one central reason, namely that exit decisions are made when the demand for goods and services declines (Lovejoy, 1971; Patton & Duhaime, 1978). This is in line with the study of Siegfried & Evans (1994). They also found that low profits were caused by enduring decreases in demand. Furthermore, some studies took the initiative to summarize theoretical reasons for firm exit (Benito, 1997; Burt et al., 2003). According to Benito’s (1997) overview of the literature, the decision to exit was mainly dependent on the economic and political environment in which a foreign affiliate operates. The summary of Burt et al. (2003) suggested that there are (i) external circumstances that can cause exits, which comprise turbulences in the specific market, long-term declines in demand, natural decline of the market, and political turmoil, and (ii) internal circumstances such as management incapability and problems related to decision-making. Finally, Hennart et al. (2002) determined the extent to which exits are driven by a liability of foreignness. This implies that foreign-going firms are confronted with extra costs compared to their local counterparts. For example, foreigners have to spend capital on gaining information about the local market conditions, which is already available to local firms. They might also be subject to discrimination by the host-country government as well as by suppliers and consumers. Lastly, they might be confronted with foreign exchange risks, which their local competitors do not incur. The authors empirically found that out of 32 exits, 13 cases were indeed due to this liability. Furthermore, exit was affected by disputes with the government, problems in managing local employees, and too optimistic market projections.
Summary of Chapters
1. Introduction: Introduces the research context regarding the entry mode choice of multinational enterprises and defines the study's core objectives to analyze long-term performance and exit reasons.
2. Literature Review: Provides a theoretical overview of the advantages and disadvantages of wholly-owned subsidiaries and joint ventures, and examines previous empirical findings on subsidiary performance and exit drivers.
3. Propositions: Formulates specific hypotheses regarding the relative longevity, exit rates, types of exit, and ownership transitions of foreign subsidiaries.
4. Methodology: Details the data collection process for 234 Dutch foreign subsidiaries and explains the statistical techniques, such as t-tests and chi-square tests, used to evaluate the propositions.
5. Results: Presents the empirical findings, showing that there are no statistically significant differences in long-term performance between ownership modes and documenting the prevalence of voluntary exits.
6. Conclusion: Synthesizes the main findings, discusses managerial and academic implications regarding strategic restructuring, and offers suggestions for future research.
Keywords
subsidiary performance, exits, ownership mode, joint ventures, wholly-owned subsidiaries, international business, foreign direct investment, strategic restructuring, long-term performance, divestment, market entry, multinational enterprises, longevity, host country environment, subsidiary equity
Frequently Asked Questions
What is the core subject of this thesis?
The thesis examines the long-term relative performance of joint ventures (JVs) and wholly-owned subsidiaries (WOSs) established by Dutch multinational enterprises and investigates the underlying reasons for their exit from foreign markets.
What are the central themes discussed in the work?
The key themes include international market entry modes, the comparative performance of ownership structures, the distinction between voluntary and forced exit strategies, and the phenomenon of converting joint ventures into wholly-owned subsidiaries.
What is the primary research objective?
The goal is to provide new insights into subsidiary performance by moving beyond short-term metrics and distinguishing between different types of exit, such as sell-offs versus liquidations.
Which scientific methods were employed?
The author utilized a quantitative approach, analyzing a sample of 234 Dutch foreign subsidiaries. Statistical analysis was performed using t-tests to compare means and chi-square tests to analyze frequency differences.
What is covered in the main body of the text?
The text covers a literature review of existing theories, the development of four specific research propositions, a detailed description of the methodology and data collection, and a presentation of the results followed by a discussion and conclusion.
Which keywords best characterize this research?
The research is best characterized by terms like subsidiary performance, ownership mode, joint ventures, wholly-owned subsidiaries, strategic restructuring, and foreign direct investment.
Did the author find significant performance differences between JVs and WOSs?
No, the empirical findings showed that there were no essential performance differences between JVs and WOSs, which is consistent with the results of prior scholarly research.
Why are voluntary exits more common than forced exits?
The study found that the majority of exits for both ownership types are voluntary, often driven by strategic restructuring where the parent company decides to refocus on core businesses or divest assets that no longer fit the corporate strategy.
What is the likelihood of a joint venture turning into a wholly-owned subsidiary?
The results indicate that this is a valid long-term strategy; specifically, 13 out of 60 JVs in the sample eventually became WOSs, with a higher probability of occurrence for majority-owned joint ventures.
- Quote paper
- Matthias Otto (Author), 2009, The Relative Performance of Joint Ventures and Wholly-Owned Subsidiaries and the Reasons why they exit, Munich, GRIN Verlag, https://www.grin.com/document/155996
