International Joint Ventures vs. Wholly Owned Subsidiaries

INTRODUCTION With the relentless onslaught of globalization, many firms are faced with the question of where and how to launch their operations in world markets or to expand and integrate their existing international operations. Some are seeking new outlets for their products and knowhow outside their home markets while others are seeking expansion capital and new technology not available in their own countries. In order to achieve these goals, a firm must determine the appropriate mode for organizing its foreign business activities. Among the vast array of alternative modes available, international joint ventures (IJV) and wholly owned subsidiaries (WOS) represent two primary but largely competing strategic options that a firm may choose. Each of these strategies has different implications for the degree of control which a firm can exercise over the foreign operation, the resources it must commit to the foreign operation, and the risks that it must bear to expand into a foreign country. Thus, the performance of one mode in relation to another is a critical measure of its relative efficacy and would directly affect their choice by firms. A primary objective of this study was to measure the performance of a sample of U.S. parent companies that were engaged in IJV or WOS in a foreign country. Prior research has concentrated mainly on the study of why IJV is chosen in preference to other alternative modes or under what conditions would IJV be an optimal choice relative to either a contractual mode (e.g. licensing) or WOS. Very few studies have examined the results of the implementation of the various strategic entry modes. This paper focused on the effectiveness of IJV versus WOS and also shed light on the characteristics of firms that pursued these strategies. LITERATURE REVIEW In the current global marketplace, strategic alliances in the form of international joint ventures have become a popular mode for entering foreign markets. Traditional direct investment methods, such as setting up wholly-owned subsidiaries, offer the benefits of total profits and full control over the foreign subsidiary. However, the higher costs and risks involved in undertaking RD Killing, 1982). Chowdhury argued that the basis for such contradiction depends on how the instability is defined. …