Corporate governance in international joint ventures

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Since the start of its economic reform in 1978, the People's Republic of China (P.R.C) has made outstanding achievements. In 2004, according to measurements on the purchasing power parity (PPP), China became the second largest economic power in the world, second only to the US. China's total GDP is equal to US$ 7.262 trillion and the GDP growth rate was 9.1% in 2004 (Nohria & Garcia-Pont, 1991). As a predominant component of China's economic reform, foreign direct investment (FDI) has played a significant role in terms of accelerating national economic growth, developing emerging economic market systems, and propelling China's globalization process forward over the last twenty-eight-years. In accordance with statistical data, P.R.C has already surpassed the US to become the world's largest recipient of FDI (The Economist 2nJ October 2004, pp. 3-24). In addition, China's foreign exchange reserves have reached US $403 billion, •which makes it the second largest in the world after Japan (The Economist 28 February 2004, p.72). International joint ventures (IJVs), as one of the most important FDI modes in China, have received growing attention from academia and practitioners. A great many studies in international joint ventures have identified IJVs as difficult organizational forms to manage because they involve shared ownership and control, and cross cultural effects (Beamish, 1988, Hennart, Roehl, & Zietlow, 1999, Inkpen & Beamish, 1997, Parkhe, 1993a). The differences in relation to national cultural backgrounds, languages, long-distance organizational culture, and management styles accentuate the inherent conflicts of interest between IJV partners; between the parent companies and the management of an IJV; and between host country nationals and foreign expatriates (Hennart, Roehl, & Zietlow, 1999, Inkpen & Beamish, 1997). Hence, to successfully operate an IJV in China is a difficult and challenging task. Although many studies on international joint ventures (IJV s) have been undertaken by previous scholars, investigation from a corporate governance perspective is still in its early stages. It was believed that corporate governance (CG) in IJVs would be more problematic than CG in nominal organization forms because a double-accountable system existed in the governance of IJVs i.e. the management needed to be accountable to at least two owners/parent companies. In considering the difficulties of owner/parent company governance activities affected by information accessibility, governing remoteness, and possible conflict resulting from double governing bodies, the corporate governance mode within successfully operated international joint ventures may provide a supplementary understanding of CG in other organization forms. Therefore, this research has empirically investigated how and why the corporate governance mode has been employed in successfully operated IJVs within the contemporary Chinese business environment. The methodological research approach of this study is qualitative, i.e. in-depth interviews, field observation, and substantive cross-case studies, etc. Following the empirical investigation, this thesis posits some suggestions which may deepen our understanding of CG in IJVs. First, the empirical evidence shows that an IJV predominantly owned by one partner will prevail in its governance practice, and in fact the owners who dominantly owned successfully operated IJVs in China were always foreign partners. The author employed several theoretical approaches to explain why such a phenomenon exists. Secondly, the evidence also identifies that the board of directors in IJV s are very weak in terms of selection mechanism and functions, which aggravates the agency risk existing in normal organizations. Thirdly, the empirical results present evidence that partners' direct involvement at the operational level is very common in all investigated IJVs. Such operational governing activities include directly appointing the key department managers, direct involvement in decision-making processes on key operational activities, and strong control of key resources commitments, etc. Based on the analysis of these empirical findings, the author draws several conclusions and implications from this study. Finally, the author draws a conclusion on the research limitations of this current study and also supplies suggestions in terms of the future research opportunities that may arise from this study.
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