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KNOWLEDE ASSETS AND DECISION RIGHTS IN JOINT
VENTURES: A PROPERTY RIGHTS VIEW
Evidence from Hungarian Joint Ventures
Josef WindspergerAssociate Professor of Organization and Management
Center for Business Studies, University of Vienna, Brünner Str. 72, AustriaPhone: +431427738180; Fax: +431427738174;
Email: [email protected]
Eva KocsisAssociate Professor of Economics
Department of Economics, Corvinus University of BudapestFővám tér 8
H-1093 Budapest, HungaryPhone: +36 1 482-5308; Fax; +361 482-5137
Email: [email protected]
Miklos RostaPhD candidate, Department of Economics, Corvinus University of Budapest
Fővám tér 8H-1093 Budapest, Hungary
Phone: +36 1 482-5308; Fax; +361 482-5137Email: [email protected]
Abstract.The paper examines the role of joint venture partners’ knowledge assets as determinant of the decision structure in joint ventures (JV). According to the property rights approach, the structure of residual decision rights depends on the distribution of intangible knowledge assets that generate the JV-firm’s residual surplus. Intangible knowledge assets refer to the knowledge and skills (know-how) that cannot be easily codified and transferred through contracts (e.g. through licensing), since they have an important tacit component. Our analysis derives the following hypothesis: The more important the JV-partner's knowledge assets for the generation of residual surplus, the more residual decision rights are assigned to him. In addition, we examine two views on the relationship between residual decision and residual income rights in joint ventures: (a) Under the substitutability view, residual decision and residual income rights may be negatively related because a certain level of control may result either from the allocation of ownership (residual income) rights or the transfer of residual decision rights to the joint venture partners. (b) Under the complementarity view, residual decision and residual income rights are complements. This means that the JV-partner’s motivation to use his intangible assets to generate residual income is increased if the residual income rights are collocated with the residual decision rights. These property rights hypotheses are tested in the Hungarian market.
Keywords: Joint ventures, intangible knowledge assets, residual decision rights, ownership
rights
1 Introduction
This paper explains the allocation of decision rights in joint ventures by applying the property
rights theory. The aim of the property rights theory, developed by Alchian, Demsetz, Fama,
Jensen, Barzel, Grossman, Hart and Moore (Alchian, Demsetz 1973; Fama, Jensen 1983;
Barzel 1997; Grossman, Hart 1986; Hart, Moore 1990; Hart 1995), is to explain the allocation
of residual rights of control of firms and networks (Jensen, Meckling 1992; Brynjolfsson
1994; Brickley, Dark, Weisbach 1991 ; Christie, Joye,Watts 1995; Hitt, Brynjolfsson 1997;
Windsperger 2004; Baker, Hubbard 2003, 2004). According to the property rights view, the
structure of residual decision rights (as residual rights of control) depends on the distribution
of intangible knowledge assets that generate the firm’s residual surplus. Intangible knowledge
assets refer to the knowledge and skills (know-how) that cannot be easily codified and
transferred to other agents, since they have an important tacit component (Kogut, Zander
1993; Contractor 2000; Contractor, Ra 2002). In joint venture relationships intangible
knowledge assets refer to the joint venture partners’ noncontractible capabilities (know how
in R&D, production and procurement management, marketing and advertising, human
resource management, organization design) that cannot be easiliy transferred by contract
(Hennart 1988; Nakamura, Xie 1998; Nakamura 2005;Eapen, Hennart 2005). The thesis of
the paper is that the more important the JV-partner‘s intangible knowledge assets relative to
the other for the generation of residual income, the more residual decision rights should be
assigned to him. In addition, we examine two views on the relationship between residual
decision and ownership rights (residual income rights) in joint ventures: Under the
substitutability view, residual decision and residual income rights may be negatively related
because a certain level of control may result either from the allocation of residual income
rights or the transfer of residual decision rights to the joint venture partners. Under the
complementarity view, residual decision and residual income rights are complements. This
means that the JV-partner’s motivation to use his intangible assets to generate residual income
2
is increased if the residual income rights are collocated with the residual decision rights.
These property rights hypotheses are tested in the Hungarian market.
Although theoretical and empirical studies dealing with the allocation of decision
rights exist in the organizational economics and accounting literature (Aghion,Tirole 1997;
Dessein 2000; Christie et al. 1995; Baiman, Larcker, Rajan 1995; Nagar 2002; Arrunada et al.
2001; Arrunada et al. 2004; Lerner, Merger 1998; Desai, Foley, Hines 2002; Kaplan,
Stromberg 2003; Elfenbein, Lerner 2003; Windsperger 2003, 2006), no prior research
develops and test an institutional economic approach of the allocation of decision rights in
joint venture companies. This deficit may result from the difficulty in collecting data on
knowledge assets and decision rights in JV. On the other hand, in the international
management literature several studies investigate the problem of control in joint ventures
(Killing 1983, Geringer, Hebert 1989; Mjoen, Tallmann 1997; Chalos, O’Connor 1998;
Calantone, Zhao 2000; Pangarka, Klein 2004; Choi, Beamish 2004). Control has been
modelled by relative degree of ownership and/or a high level of management control and/or a
high level of control of specific activities (Blodgets 1991a,b; Gray, Yann 1992; Mjoen,
Tallman 1997). The main deficit in this literature lies in the heterogeneous concept of control
and hence in the lack of theoretical rigor concerning the operationalization of control (Yan,
Gray 2001).
Based on the property rights theory, in this paper we operationalize control by the
distribution of residual decision rights (Aghion, Tirole 1997; Baker et al. 2005; Windsperger
2003). This view is closely related to Rajan and Zingales’ concept of access to critical
resources (Rajan, Zingales 1998; 2001). They argue power stems form control over critical
assets that generate the residual income strem. Our main contribution to the joint venture
literature is twofold: First, we present a property rights view of the allocation of residual
decision rights as residual rights of control of the JV-company, and second we empirically
investigate the influence of intangible knowledge assets on the structure of residual decision
rights in Hungarian joint ventures. Consequently, this research moves forward the theoretical 3
view of structuring decision making in JV by stating that the allocation of residual decision
rights depends on the intangibility (noncontractibility) of knowledge assets of the joint
venture partners.
The paper is organized as follows. Section two uses the property rights approach to
examine the relationship between the characteristics of the JV-partner’s knowledge assets and
the allocation of residual decision rights. We develop the proposition that the structure of
residual decision rights depends on the distribution of intangible knowledge assets between
the joint venture partners. Section three investigates the relationship between residual decision
and ownership rights in joint ventures. In section four we apply this framework to derive
testable hypotheses. The hypotheses are finally tested in Hungary.
2 Knowledge Assets and Decision Rights in Joint Ventures
2.1 A Property Rights View of Structuring Residual Decision Rights
Based on the property rights theory, Jensen and Meckling (1992) argued that organizational
efficiency requires that those with the responsibility for decisions also have the knowledge
valuable to those decisions. Co-location of decision rights with knowledge can be achieved by
transferring the knowledge to the person who has the decision right or by transferring the
decision rights to the person with the knowledge. Such transfers mean that knowledge transfer
costs determine the degree of centralization of decision making. Which factors influence the
knowledge transfer costs? According to the property rights approach (Hart, Moore 1990) the
structure of residual decision rights depends on the distribution of intangible (noncontractible)
assets. The person who has intangible knowledge assets that generates the residual surplus
should have the residual decision rights to maximize the residual income. These rights refer to
the use of specific knowledge of place and time (Hayek 1945) that cannot be easily
communicated and specified in contracts due to too high transaction costs. Consequently,
given the distribution of intangible knowledge assets the maximum resource value obtains if
the residual decision rights are assigned to those who are best able to use these assets (Wruck, 4
Jensen 1994). In sum, the property rights view of the relationship between knowledge assets
and decision rights can be stated by the following proposition: The more important a person’s
intangible knowledge assets for the generation of the residual income relative to another
person, the more residual decision rights should be assigned to that person.
2.2 Allocation of Decision Rights in Joint Ventures
Now we apply the property rights approach to the allocation of decision rights in joint
ventures. Which knowledge assets are generated and used in joint venture companies and how
are the decision rights allocated between the JV-partners? In the following, we analyse a joint
venture company (JV) with two joint venture partners (JPI and JPII). The JV-partner’s parent
firms that create a joint venture company faces the problem of maximizing the returns to the
intangible assets when they are dependent on investments in intangible assets of the other
partner. The intangible knowledge assets (know-how) of JPI includes knowledge and skills
(capabilities) in product development, procurement, production and branding, and the
intangible knowledge assets of JPII refer to the local market access, cultural know-how and
human resource management capabilities (Lecraw 1984; Fagre, Wells 1982; Hennart 1988;
Nakamura 2005).
How does the distribution of intangible knowledge assets between the JV-partners
influence the distribution of decision rights in the JV-company? Decision rights refer to the
strategic and operative decisions of the JV, such as strategy, organization design, product,
price, marketing, advertising, procurement and production, finance and investment, human
resource management, and controlling system. According to Jensen and Meckling (1992),
two ways for allocating decision rights exist: Either knowledge must be transferred to those
with the right to make decisions or decision rights must be transferred to those who have the
knowledge. Thus, decision rights are allocated to JPI when the costs of transferring
knowledge from JPII to JPI are relatively low. This is the case when JPII‘s knowledge assets
are less intangible and therefore more contractible. In this case JPI has a stronger bargaining 5
power, due to his intangible knowledge assets, and can easily acquire the knowledge assets of
JPII, due to its high degree of contractibility (low degree of intangibility). On the other hand,
residual decision rights have to be transferred to JPII when his know-how is very specific and
consequently the knowledge transfer and control costs are very high. In this case, the
bargaining power of JPII is relatively strong due to his noncontractible know-how. Moreover,
if it is important to take advantage of both partners’ intangible knowledge assets to generate
the residual income stream, decision making power must be allocated to both partners to
efficiently utilize their specific knowledge. This property rights view is compatible with the
resource-based view of bargaining power developed in the resource-based theory (Pfeffer,
Salancik 1978; Lecraw 1984; Blodgetts 1991; Chi 1994; Yan, Gray 1994); however, this
literature does not apply a homogeneous construct for control and differentiate between more
and less contractible (intangible) resources.
In sum, according to the property rights theory residual decision rights have to be
allocated according to the distribution of intangible knowledge assets between the JV-
partners. More intangible assets of JPI compared to JPII must lead to a higher proportion of
residual decision rights of JPI relative to JPII and vice versa. Therefore, an efficient decision
structure implies co-location of knowledge assets and decision rights (Milgrom, Roberts
1995; Hitt, Brynjolfsson 1997).
The following example illustrates this implication. We differentiate between two cases:
Case A: JPI has a large fraction of intangible knowledge assets (for instance
technological and brand name know-how) and the know-how of JPII (for
instance local market knowledge, human resource capabilities) is less
intangible (more contractible). Due JPI’s dominant know-how position he
should get a large fraction of residual decision rights to maximize the JV’s
residual income stream.
6
Case B: JPII has a large fraction of intangible knowledge assets that generate a
high residual surplus and the JPI’s assets are less intangible. In this case, the
residual decision rights must be assigned according to JPI and JPII’s know-
how position. Therefore, compared to case A, JPII has a stronger bargaining
power and hence more residual decision rights are transferred to JPII.
If these conditions are not fulfilled, the following inefficiencies may arise: Inefficiencies arise
(1) when – in case A - a large fraction of residual decision rights is transferred to JPII
although JPI has the most important part of intangible knowledge assets that creates a large
fraction of the total residual income stream of the JV, or (2) when - in case B - a low fraction
of residual decision rights is transferred to JPII, although JPI has only a small part of
intangible knowledge assets. Due to this incompatibilitiy between the distribution of
intangible knowledge assets and the allocation of decision rights the JV’s residual surplus
cannot be maximized.
The property rights proposition about the structure of residual decision rights in joint
ventures can be summarized as follows: The more important the JV-partner’s intangible
knowledge assets for the generation of the residual income relative to other partner, the more
residual decision rights should be assigned to him. The following testable hypothesis can be
derived:
H1: The higher the intangible knowledge assets of JPI relative to JPII, the
higher is JPI’s portion of residual decision rights.
3 Residual Decision and Ownership Rights: Complements versus Substitutes
Since the governance structure of the JV-company consists of ownership (residual income)
and decision rights, the question to ask is which relationship exists between residual income
rights and residual decision rights. There are two views on the relationship between residual
decision rights and ownership rights:
7
(I) Under the complementarity view of the governance structure (Milgrom, Roberts 1995),
residual decision and residual income rights are complements. This means that the JV-
partner’s motivation to use his intangible assets to generate residual income is increased if the
ownership rights are collocated with the residual decision rights. Hence the transfer of
ownership rights increases the knowledge and incentive effect of residual decision rights
(Brickley et. al 1995). This is primarily the case when one JV-partner has a dominant know-
how position and hence his investment incentive in intangible knowledge assets primarily
determines the total residual income stream of the JV.
(II) Under the substitutability view of the governance structure, residual decision and
residual income rights are substitutes. As already Lecraw (1984) mentioned, residual decision
and residual income rights may be negatively related because a certain level of control may
result either from the allocation of ownership rights as high powered incentives or the transfer
of residual decision rights. Under this view, the more residual decision rights are assigned to a
joint venture partner, the less ownership rights must be allocated to him to maintain a certain
level of control. This is primarily the case when both partners have a strong know-how
position and hence their co-specialized investments in intangible knowledge assets determine
the total residual income stream. In this situation, a lower proportion of ownership rights of
JPI relative to JPII must be compensated by a higher proportion of residual decision rights. In
sum, the interaction effect between decision and ownership rights depends on the impact of
the JV-partners intangible assets on the creation of the total residual surplus of the JV. We can
derive the following hypotheses:
H2a: Complementarity hypothesis: The JV-partner’s residual deicision rights are
positively related with his ownership rights.
H2b: Substitutability hypothesis: The JV-partner’s residual decision rights are negatively
related with his ownership rights.
8
4 Empirical Analysis
4.1 Data Collection
The empirical setting for testing these hypotheses is the Hungarian market. We used a
questionnaire to collect the data from a sample of 800 Hungarian companies. Since we have
no details on the shared ownership status of these companies, we received unfilled
questionnaires from more than thirty percent of these companies. The data set was collected
between October 2004 and March 2005. The questionnaire took, on average, approximately
15 minutes to complete. We received 80 completed responses. To trace non-response bias, we
investigated whether the results obtained from analysis are driven by differences between the
group of respondents and the group of non-respondents. Non-response bias was measured by
comparing two groups of responders (October 2004, March 2005) (Amstrong & Overton
1977). No significant differences emerged between the two groups of respondents.
4.2 Measurement
To test our property rights hypotheses the following variables are important: Intangible assets
of the joint venture partners, ownership rights, residual decision rights, as well as firm size,
age of the JV and technological uncertainty as control variables.
Intangible Knowledge Assets
The joint venture partner’s intangible assets refer to the specific knowledge of local markets,
distribution channel, procurement, human resource management, technological know-how
and knowledge of the institutional environment. In the questionnaire the managers of the
Hungarian JV-companies were asked to rate on a seven-point scale to evaluate JV-partner's
intangible assets. A ten-item scale measures the know-how advantage of JPI compared to JPII
(see appendix). The ten-item measure was extracted by employing factor analysis. All
variables had a loading in excess of 0.7. The total amount of variance explained by the factor
9
solution is 64 percent. The reliability of this scale was assessed by Cronbach’s alpha (0.93)
(Hair, Anderson, Tathan, Black 1998).
Residual Decision Rights of the Joint Venture Partners
The indicator of decision rights (DR) is a measure about the distribution of decision-making
authority between the joint venture partners. Our decision rights variable includes the
following decisions of the JV: Procurement decision, price and product decisions, advertising
decision, human resource decisions (recruitment and training), investment and finance
decisions and decisions concerning the application of accounting and control systems. The
indicator of decision rights addresses the extent to which residual decisions are made by JPI
compared to JPII. Hence it is a measure for distribution of decision rights in the joint venture
company that is compatible with the Nagar’s measure of decision rights in retail banking
(Nagar 2002). The managers of the joint venture companies were asked to rate the joint
venture partner's influence on these decisions on a seven-point scale. By averaging the scale
values we constructed a decision index varying between 1 and 7. The higher the index, the
higher the JPI's influence on residual decision making in the joint venture company relative to
JPII.
Ownership Rights of the Joint Venture Partners
The joint venture partner’s ownership rights (OR) are measured by percentage of ownership
of the joint venture partners in the joint venture company (= equity ratio).
Control Variables
We controlled for three variables that might affect the allocation of decision rights in joint
ventures. These variables refer to the average sale volume of the parent firm, the age of the
joint venture, and the technological uncertainty.
10
Firm Size (SIZE): We use the average sale value of the JV-partner’s parent firm as
proxy of the firm size representing economies of scale of coordination. The larger the size of
the parent firm, the larger its coordination and monitoring capacity, the more easily the parent
firm can control the joint venture company, and the lower the propensity to transfer residual
decision rights to the other partner.
Joint Venture Experience (AGE): We use the number of years of the joint venture
company’s existence as proxy for interorganizational learning. The older the joint venture
company, the larger the knowledge conversion effect from tacit to more explicit knowledge
due to organizational learning (Inkpen 2000; Nonaka, Takeuchi 1995), the larger is the parent
firm’s access to the joint venture partners knowledge (Inkpen 2000, Nonaka, Takeuchi 1995),
and hence the more residual control can be exercised by the parent firm.
Technological Uncertainty (UNCERT): We use technological uncertainty as proxy for
the costs of knowledge spillover. The cost of knowledge spillover may arise because
competitors and/or joint venture partners could learn intangible knowledge assets when the
joint venture company is created (Nakamura 2005; Hennart, Zeng 2005). Under given
intangible assets, the spillover costs may increase with uncertainty due to the dynamics and
frequency of technological change. If the technological uncertainty is high, the JV-partner
may lose his know how advantage, when the the partner has a large fraction of the residual
control rights. Hence the higher the technological uncertainty, the higher the JV-partners risk
of knowledge spillover, and the more residual decision rights are necessary to capture a large
fraction of the residual surplus.
4.3 Results
4. 3. 1 Descriptive Statistics
Table 1 and 2 present descriptive data for the Hungarian joint venture companies.
11
Table 1: JV-Partner’s Know How and Ownership Rights
78 ,04 ,99 ,6208 ,22224
80 1,00 7,00 3,2750 2,20457
80 1,00 7,00 2,7750 1,71350
80 1,00 7,00 3,4625 1,98056
80 1,00 7,00 3,7750 2,01246
80 1,00 7,00 3,8875 2,0188679 1,00 7,00 3,8481 2,26506
79 1,00 7,00 3,4304 1,85834
79 1,00 7,00 3,8861 2,05680
79 1,00 7,00 3,3671 2,23135
79 1,00 7,00 3,0000 1,96116
JV-partner 1's proportionof ownershipKnow how in productionand logisticsKnow how in humanresource managementLocal services know howKnow how in strategicplanningKnow how in controllingR&D-know howKnow how inorganization designKnow how in strategyformationLocal market knowledgeKnowledge of localinstitutions
N Minimum Maximum MeanStandarddeviation
Table 2: Decision Rights in Joint Ventures
79 1,00 7,00 3,0886 2,19083
79 1,00 7,00 3,1392 2,06766
78 1,00 7,00 3,3205 2,09200
79 1,00 7,00 3,4304 2,07354
79 1,00 7,00 3,4430 2,09240
79 1,00 7,00 3,5190 2,06845
79 1,00 7,00 3,5570 2,28005
80 1,00 7,00 3,6375 2,24027
79 1,00 7,00 3,6456 2,11247
78 1,00 7,00 3,7051 2,18084
79 1,00 7,00 3,7722 2,18942
80 1,00 7,00 3,8625 2,26556
80 1,00 7,00 4,2375 2,33977
80 1,00 7,00 4,2750 2,29460
80 1,00 7,00 4,3500 2,10545
79 1,00 7,00 4,3924 2,21543
79 1,00 7,00 3,69410 1,78139
DR in recruiting humancapitalDR in training of humancapital DR in selectingcooperation partnersDR in selectingsuppliersDR in determiningincentives and wagesDR in promotion andadvertisingDR in determining theproduct priceDR in determining theJV-organizationDR in marketingmanagementDR in productionmanagementDR in productmanagementDR in accounting andcontrollingDR in selecting lendersDR in financialmanagementDR in strategy buildingDR in selectinginvestment projectsDecision right index
N Minimum Maximum MeanStandarddeviation
12
4. 3.2 Regression Analysis
H1: Decision Rights-Hypothesis:
To test the hypothesis we carry out an ordinal regression analysis with the index of decision
rights (DR) as independent variable (Chu, Anderson 1992): The explanatory variables refer to
joint venture partner’s knowledge advantage (KNOW), firm size (SIZE), age (AGE) and
technological uncertainty (UNCERT). Therefore, we estimate the following regression
equation:
DR = + 1KNOW+ 2SIZE + 3AGE + 4UNCERT
Based on our property rights hypothesis, DR varies positively with the JPI-know-how
advantage (KNOW). Further, we include three control variables: DR vary positively with the
following variables: SIZE due to economics of scale of coordination and monitoring, AGE
due to organizational learning and technological uncertainty (UNCERT) due to the
knowledge spillover risk.Hence 1, 2, 3 and 4 have a positive sign.
Results of the ordinal regressions are provided in table 3. The fit of the models was
based on the log of the likelihood ratio. For model 1 the chi-square value of 31.178 is
significant at p < 0.001 thus rejecting the null hypothesis that the estimated coefficients are
zero.The overall fit of the ordinal regression model point to the appropriateness of the set of
variables in predicting the distribution of residual decision rights in joint ventures. In model 1
the coefficients of intangible knowledge assets (KNOW) is highly significant and consistent
with our property rights hypothesis. The larger JV1-know how advantage, the more residual
decision rights are transferred to him. In addition, the coefficients of the control variables
(SIZE and UNCERT) have the expected positive sign and are significant. On the other hand,
AGE is not significant. Finally colinearity diagnosis was performed using correlations
between the independent variables (see table 4). 13
Table 3: Ordinal Regression Results
MODEL 1
Dependent Variable: Decision Rights (DR)
Independent Variables CoefficientsThreshold Constants
Intangible Knowledge Assets (KNOW)
Firm Size (SIZE)
Age of the Joint Venture (AGE)
Uncertainty (UNCERT)
Model Statistics:N = 68Model Chi-square = 31.178 (p < 0.001)-2 Log likelihood = 219.943Nagelkerke R Square = 0.377
-1,172(1.228)0,056
(1,205)1,146
(1,213)2,508**(1,237)3,205**(1,254)
4,303***(1,298)
1,148***(0.264)0,464**(0.22)0,377
(0.351)0,72***(0,228)
*** p < 0.01; **p < 0.05; *p < 0.1; values in parentheses are standard errors.
Table 4: Correlations between independent variables
1,000 ,154 ,220 -,281,154 1,000 ,001 -,054,220 ,001 1,000 -,172
-,281 -,054 -,172 1,000
SIZEAGEKNOWUNCERT
SIZE AGE KNOW UNCERT
H2: Interaction between Decision and Ownership Rights
The hypotheses (H2a, H2b) are tested by using ordinal and 2SLS regression.The governance
structure of the joint venture consists of residual decision rights (DR) and ownership rights
14
(OR). Hence the choice of DR may depend on the choice of the OR, and other factors, such as
intangible assets, size, age and uncertainty.
DR = + 1KNOW+ 2SIZE + 3AGE + 4UNCERT + 5OR
Support for substitutability exists if DR and OR are negatively related and support for
complementarity exists if DR and OR are positively related. To estimate the equation, we
employ ordinal regression analysis and the two-stage least squares (2SLS) procedure (Greene
2000). Table 5 reports the result of the ordinal regression analysis. The fit of the model
increased compared to model 1 (Table 3). For model 2 the chi-square value of 36.908 is
significant at p < 0.001 and Nagelkerke R Square is 0.429. In model 2 the coefficients of
intangible knowledge assets (KNOW) is highly significant and consistent with our property
rights hypothesis. SIZE and UNCERT are significant and have the expected positive sign.
The coefficient of the proportion of ownership (OR) of JPI is positive and highly significant.
This result is compatible with the complementarity view of residual decision and ownership
rights. The JV-partner with intangible assets that generate a larger part of the residual income
should have a higher proportion of residual decision and ownership rights. In this case, the
transfer of ownership rights strengthens the knowledge and incentive effect of allocating
residual decision rights. Table 6 reports the result of 2SLS regression analysis. Model fit is
acceptable with F value of 7.21 and R2 value of 0,32. The result for KNOW is consistent with
the property rights hypothesis. The coefficients of SIZE and AGE have the expected sign. The
impact of UNCERT on residual decision rights (DR) is slightly significant indicating that
higher technological uncertainty requires more residual control by the parent firm to reduce
the knowledge spillover risk. However, the coefficient of OR is positive but not significant
under 2SLS regression analysis.
15
Table 5: Ordinal Regression Results (Model 2)
MODEL 2
Dependent Variable: Decision Rights (DR)
Independent Variables CoefficientsThreshold Constants
Intangible Knowledge Assets (KNOW)
Firm Size (SIZE)
Age of the Joint Venture (AGE)
Uncertainty (UNCERT)
Proportion of Ownership Rights (OR)
Model Statistics:N = 68Model Chi-square = 36.908 (p < 0.001)-2 Log likelihood = 217.796Nagelkerke R Square = 0.429
3,634**(1.778)
4,964***(1,796)
6.214***(1,837)
7.816***(1,91)
8,576***(1,949)
9,792***(2,025)
1,108***(0.261)0,437*(0.226)0,475
(0.354)0,659***(0,228)
2,514***(1,066)
*** p < 0.01; **p < 0.05; *p < 0.1; values in parentheses are standard errors.
16
Table 6: 2SLS Results
Dependent Variable: Decision Rights (DR)
Independent Variables CoefficientsConstant
Intangible Knowledge Assets (KNOW)
Firm Size (SIZE)
Age of the Joint Venture (AGE)
Uncertainty (UNCERT)
Proportion of Ownership Rights (OR)
Model Statistics:N = 62F = 7,21 (p < 0.001)Adjusted R Square = 0.32
-2,65(2,46)
0,716***(0.177)0,258
(0,329) 0,554(0.341)0,433*(0,253)
3,73(5,872)
*** p < 0.01; **p < 0.05; *p < 0.1; values in parentheses are standard errors.
5. Discussion and Implications
The goal of the paper is to provide a property rights explanation of the allocation of residual
decision rights in joint ventures by emphasizing the joint venture partner’s intangible
knowledge assets as explanatory variables. This study presents the first empirical evidence
that the allocation of residual decision rights in joint ventures depends on the distribution of
intangible knowledge assets between the joint venture partners. First, we develop the
hypothesis that the joint venture partners’ residual decision rights directly vary with the
importance of his intangible knowledge assets to generate the ex post surplus. The data from
80 Hungarian joint ventures confirm the hypothesis that the joint venture partner’s intangible
assets positively influence the tendency toward a higher proportion of residual decision rights.
Second, we investigate the relationship between residual decision and ownership rights of the
joint venture partners. Our results are compatible with the complementarity view of the
governance structure (Milgrom, Roberts 1995; Jensen, Meckling 1992). In this case, the JV-17
partner’s motivation to use his intangible assets to generate residual income is increased if the
ownership rights are co-located with the residual decision rights. The data from 80 Hungarian
joint ventures partially support this hypothesis. In addition, compared to previous studies in
the international business literature, our study made an important contribution by
operationalizing JV-control through residual decision rights.
However, our empirical study has some limitations: First, although the database in the
survey sample is diverse, it remains far from a large and statistically random sample. Second,
while the empirical results provide some support for the proposed complementarity
relationship between residual decision and ownership rights, additional empirical evidence
would increase the generalizability of the results. Furthermore, future research has to
investigate the relationship between the allocation of decision rights and the performance of
the joint venture. Our property rights proposition suggests a positive relationship between the
complementarity of intangible assets and residual decision rights, on the one hand, and the
performance of the joint venture company, on the other hand.
This study also has managerial implications. The result of this study indicates that the
distribution of decision making authority in joint ventures must be based on the importance of
the JV-partners intangible knowledge assets for the creation of residual surplus. Therefore this
study provides companies with an explanation of a way to structure the residual decision
rights in joint ventures. The JV’s decision structure must be aligned with the JV-partners’
specific know how. High partner-specific know how under a low proportion of residual
decision rights may not generate a high residual surplus for the joint venture company,
because the joint venture partner does not efficiently use his intangible knowledge assets.
Conversely, low partner-specific know how under a high proportion of residual decision
rights is unlikely to maximize the residual income stream, because the joint venture partner
has not the capabilities to create a high residual surplus.
18
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APPENDIX: MEASURES OF VARIABLES
Intangible knowledge assets (KNOW): (ten items; Cronbach Alpha = 0,94): (no advantage 1 – 7 very large advantage) JV-partner 1’s know how advantage compared to JV-partner 2 evaluated by the joint venture manager concerning the following items:
(Production and logistics, recruiting, local market services, strategic planning, controlling, R&D, organization design, strategy formation, local market knowledge, local institutional knowledge)
Firm size (SIZE): Average sale value of the parent firm (per year)
Age of the joint venture company (AGE): Joint venture companies’ years of existence
Technological uncertainty (UNCERT) (one item):JV-manager has to evaluate technological uncertainty on a 5-point scale:Extent of technological changes: (1 – not at all; 5 – very large extent)
Decision rights index (DR) (Mean of 1. – 15): To which extent are the following decisions made by the JV-partner 1 compared to JV-partner 2? (no extent 1 – 7 to a very large extent)
(Recruiting, training, selection of cooperation partners, selection of suppliers, incentives and wages, promotion and advertising, investment projects, price decisions, organization structure and strategy, marketing, product management, production and procurement, accounting and controlling system, selection of lenders)
Ownership rights (OR): Percentage of asset ownership of the joint venture partners (= equity ratio)
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