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RESEARCH PAPER
Governance Structure and the Creation and Protectionof Technological Competencies: International R&DJoint Ventures in China
Jiatao Li1 • Zhenzhen Xie2
Received: 26 October 2013 / Revised: 19 August 2015 / Accepted: 27 October 2015 /
Published online: 27 November 2015
� Springer-Verlag Berlin Heidelberg 2015
Abstract International research and development (R&D) joint ventures have been
widely used by multinational enterprises (MNEs) to enhance knowledge creation in a
global network of foreign subsidiaries while at the same time, managing the critical task
of protecting the knowledge transferred and created. In emerging economies where
institutions for protecting intellectual properties are likely to be weak, equity joint
ventures (EJVs) are often used to meet the needs for knowledge protection by aligning
the interests of partners in collaboration. However, the advantages of using EJVs come at
a price—higher organizational cost and lack of flexibility. This study suggests two key
factors that would affect the choice of EJVs as a risk-mitigating mechanism in protecting
technological competencies: the scope of R&D activities and the types of joint venture
(JV) partners. We propose that MNEs can reduce their use of EJVs when the scope of
R&D activities is limited to research-oriented ones or when academic institutions are
chosen as local partners. Furthermore, a large cultural distance between the host and
home countries of MNEs tends to strengthen these effects. Collecting data from China
Business Review, Business China, and the LexisNexis and Proquest databases, the
authors conducted an empirical test with data on 319 international R&D JVs established
in China during 1995–2002. The results largely support these hypotheses.
Keywords R&D internationalization � Joint venture � Entry mode � Partner
choice � R&D scope � China
& Jiatao Li
Zhenzhen Xie
1 Department of Management, School of Business and Management, Hong Kong University of
Science and Technology, Kowloon, Hong Kong SAR
2 Department of Innovation, Entrepreneurship and Strategy, School of Economics and
Management, Tsinghua University, Beijing, China
123
Manag Int Rev (2016) 56:123–148
DOI 10.1007/s11575-015-0268-1
1 Introduction
Multinational enterprises (MNEs) have increasingly been internationalizing their
R&D activities to: (1) take advantage of host country scientific and technological
inputs, and (2) respond to local market needs and innovate closer to their product
markets and manufacturing facilities (Arvanitis and Hollenstein 2011; Belderbos
2003; Li and Xie 2011; Li and Zhong 2003; Luo 2006). Specifically, by engaging in
international R&D joint ventures (JVs), MNEs are able to focus on and invest in a
few areas of core competencies, to leverage the resources and capabilities of local
partners in other areas, and to reduce the uncertainty inherent in operating in
unfamiliar foreign business environments (Dunning 1994; Frankort et al. 2012;
Marin and Siotis 2008). Despite these advantages, the efforts made by MNEs to
develop new technological competencies through international R&D JVs, such as
by transferring and recombining knowledge, are likely to put their technological
competencies at risk of misappropriation (Evangelista and Hau 2009; Li et al. 2008;
Rivkin 2001). This creates tension between the creation and the protection of
technological competencies abroad. MNEs have been found to use equity joint
ventures (EJVs) to manage this tension. Compared with contract-based governance
structures, equity-based ones can help align the interests of the partners and thus
better protect technological competencies from potential misappropriation by
opportunistic partners (Che and Facchini 2009; Garcia-Canal et al. 2008; Hennart
1988; Li and Xie 2011; Pisano 1989).
However, compared with contract-based joint ventures (CJVs), EJVs incur
greater organizational cost and provide less flexibility (Dussauge and Garette 1999;
Hagedoorn 1993; Kogut 1988; Porter 1987). This could become a critical issue as
the importance of flexibility and adaptability for MNEs’ global success continues to
grow in the increasingly uncertain world (Koza et al. 2011). Thus, when the risk of
knowledge misappropriation is lower, MNEs tend to replace EJVs with CJVs.
Previous literature suggests that the risk of knowledge misappropriation is reduced
by MNEs through (1) limiting the scope of R&D activities (Li et al. 2008; Oxley
and Sampson 2004); or (2) choosing appropriate JV partner(s) who are not likely to
become direct competitors (Kang and Kang 2010; Li et al. 2008).
Unfortunately, prior research has not adequately addressed the following two
concerns. First, besides the advantages over CJVs in terms of knowledge protection,
EJVs are also good at facilitating knowledge sharing and transfer in international
R&D JVs by providing a more stable structure and more frequent interactions
between more committed partners (Jiang and Li 2009; Phene and Tallman 2012).
While CJVs may replace EJVs to increase partnership flexibility when the concern
over knowledge protection is reduced, they may still reduce the effectiveness of the
partnership if the partners do not value the flexibility offered by the contract-based
governance structure. Therefore, when MNEs consider replace EJV with CJV, they
need to take into account not only knowledge protection but also the importance of
flexibility in knowledge creation. This has not been adequately addressed in
previous literature. Second, prior research has largely ignored the heterogeneity
among partnerships. Because EJVs may suffer from higher organizational costs than
124 J. Li, Z. Xie
123
CJVs, the use of EJVs will most likely be reduced for those partnerships that suffer
more organizational costs, especially when the concern over knowledge protection
is reduced with limited scope of R&D activities or less opportunistic partners.
The current paper tries to fill these gaps by investigating how MNEs chose
governance structures in international R&D JVs in China from both the perspective
of knowledge protection and knowledge creation. Since the inputs and outputs of
research-oriented R&D activities are less likely to be subject to appropriation risks,
and the high uncertainty involved in research-oriented knowledge creation process
requires high flexibility in partnerships, CJV is a better governance structure than
EJV when an R&D JV focuses on research-oriented activities. Since academic
institutions are usually less opportunistic partners, and the divergence in long-term
objectives between academic institutions and MNEs increases the importance of
flexibility considerations in partnerships, CJV is a better governance structure than
EJV when the local partner is academic. Therefore, MNEs are less likely to adopt
equity-based governance structure in an international R&D JV when it focuses on
research-oriented activities or an academic local partner is chosen. Furthermore,
since the cultural distance between the host and home countries of MNEs tends to
increase EJVs’ organizational costs substantially (Pothukuchi et al. 2002), it is
likely to reduce MNEs’ preference for EJVs and increase the likelihood of EJVs
being replaced with CJVs when an R&D JV focuses on research-oriented activities
or an academic local partner is chosen. Data on 319 international R&D JVs
established in China during 1995–2002 largely support these arguments.
2 Theoretical Framework
2.1 The Governance Structure of R&D Joint Ventures
JVs are defined as organizational units created ‘‘…when two or more firms pool a
portion of their resources within a common legal organization’’ (Kogut 1988,
p. 228). They can take the form of either EJV or CJV. Whether to collaborate with
local partners in R&D through an equity-based or a contract-based JV is an
important decision, since the two entry modes represent different degrees of control,
resource commitment, and risks (Anderson and Gatignon 1986; Hagedoorn 1993).
EJVs are legally and administratively independent from the parent firms, but are
similar to hierarchical organizational structures as the parents share control and
profit (Williamson 1996). Transaction cost economics (TCE) suggests that due to
the shared control and profit, the hierarchical structure provides a higher level of
behavior control and better protection of the technological competencies within
EJVs (Garcia-Canal et al. 2008; Hennart 1988). The knowledge-based view
suggests that due to the formal structure and stable interaction between partners,
EJVs facilitate knowledge sharing between partners, especially the tacit and
uncodified knowledge (Kogut 1988), which further benefits collaborative knowl-
edge creation (Jiang and Li 2009). However, the semi-independent status of EJVs at
the same time leads to greater organizational costs and less flexibility (Kogut 1988;
Porter 1987), greater risks of there being differing strategic objectives between
Governance Structure and the Creation and Protection… 125
123
partners (Dussauge and Garette 1999), and a higher failure rate in the long-run.
Firms today are embedded in an environment where chaos, uncertainty and risk are
pervasive (Koza et al. 2011). This makes adaptability and flexibility more critical
for knowledge creation, and the drawbacks of EJVs more detrimental.
Like EJVs, CJVs are also separate organizational units that involve the sharing of
resources and risks, and commitment from the parents. However, CJVs are more
market-like compared with EJVs and do not involve equity sharing. The terms and
conditions regarding the pattern of a CJV partner’s contribution, profit distribution
and management control are not based on equity investments of the partner, but the
result of ex ante negotiations between partners (Wang 2007). Based on TCE, this
reduces the protection of the technological competencies within CJVs due to lack of
ex post profit-sharing arrangement and hierarchy-like behavioral control. However,
according to resource-based perspective, CJVs reduce resource commitment and
offer more flexibility in R&D investment, which is especially valuable in rapidly
changing technological development (Hagedoorn 1993, 2002; Harrigan 1988; Koza
et al. 2011; Wang 2007). In recent years, CJVs have become popular among R&D
JVs and also more prevalent in industry-academy collaborations (Kuittinen et al.
2009; Schmoch 1999).
To sum up, the choice between EJV and CJV structures in R&D JVs resembles
the make-or-buy decision with regard to intellectual capital as innovation inputs and
outcomes (Pakes and Griliches 1984). An EJV structure (closer to a ‘‘make’’
decision) partially internalizes the transaction, protecting proprietary intellectual
inputs and outcomes of JVs and benefiting knowledge sharing. However, it is
subject to higher resource commitment, higher organizational costs and less
flexibility. A CJV structure (closer to a ‘‘buy’’ decision) gets access to partners’
resources through a more arm-length relationship with good flexibility, but tends to
put the proprietary intellectual inputs and outcomes at risk and may suffer some
difficulties in knowledge sharing (Collinson et al. 2005; Pisano 1990).
2.2 Research Objectives and Choice of Governance Structure
International R&D investments can be categorized as either research-oriented or
development-oriented (Li 2010; von Zedtwitz and Gassman 2002). Overseas
investments in development-oriented activities are generally driven by market
conditions abroad which make it necessary or advantageous to adapt products and/
or processes to the local market (Li 2010). Such overseas development is
exploitation-oriented in the sense that it is existing products and technologies that
are being customized (March 1991). By contrast, overseas investment in more basic
research is generally driven by scientific, technological or supply-related factors,
such as the supply of engineers and technical knowledge in the overseas location (Li
2010).
The risk of proprietary asset leakage is different for development-oriented and
research-oriented R&D projects. Development work usually involves transferring
relatively mature, well-codified, and ready to be commercialized knowledge to the
host country (Frankort et al. 2012). In general, the value of such knowledge is more
immediate discernible to potential competitors, who find this type of knowledge
126 J. Li, Z. Xie
123
easier to understand, imitate, and put into practice (Teece 1976; Zander and Kogut
1995). This makes the risk of leakage with development-oriented R&D higher, and
the damage caused by the leakage is likely to be serious. On the other hand, the
outcomes of more basic research are less mature, less codified, and therefore more
costly for competitors to understand, transfer, imitate and apply (Diericks and Cool
1989; Teece 1976). Even if the knowledge does leak, the local competitors’
absorptive capabilities and complementary assets may be too limited to make good
use of it (Cantwell and Colombo 2000). Therefore, the risk of leakage with research-
oriented R&D is smaller, and any damage caused by leakage is likely to be less
serious. This suggests that limiting the scope of R&D to more basic research help
reduce the concern over protecting both the input and output of knowledge.
Therefore, limiting the scope of R&D to basic research may reduce the need of
adopting the equity-based governance structure in protecting the technological
competence of international R&D JVs.
At the same time, since the input and output of research-oriented R&D activities
usually involve substantial uncertainty but less resource commitment (Frankort
et al. 2012; Freeman and Soete 1997), firms usually prefer more flexible governance
structure (Cyert and March 1963). Therefore, partners may prefer to organize
research-oriented R&D activities with CJVs rather than with EJVs not only due to
reduced concern over knowledge protection but also for the flexibility offered by the
contract-based governance structure. To sum up, when the R&D activities
conducted in an international R&D JV are restricted to those that are less likely
to be misappropriated by local competitors and can be better conducted in a more
flexible structure, such as basic research, MNEs are less likely to rely on EJVs for
knowledge protection and creation.
Hypothesis 1 (H1): Ceteris paribus, when a foreign R&D investment is
research-oriented, the EJV mode is less likely to be chosen for the R&D JV.
2.3 Partner Selection and Choice of Governance Structure
Partner selection has long been believed to be one of the critical decisions a firm
makes when engaging in any partnership (see, for example, Chand and Katou 2012;
Geringer 1991; Hitt et al. 1995; Koot 1988). However, not until recently was partner
selection considered a mechanism through which firms in an R&D partnership can
protect their technological competencies (Li et al. 2008). It was discovered that by
differentiating between friends, acquaintances and strangers when choosing
partners, firms in R&D JVs can ‘‘control the threat of knowledge leakage and
retain their core proprietary assets’’ (Li et al. 2008, p. 315). In this study, we focus
on the choice between academic institutions (i.r., universities and research
institutes) and firms as R&D JV partners.
Ever since the linear model of innovation was proposed (Bush 1945), there has been
little doubt that academic research contributes substantially to the knowledge stock
available within a wide variety of industries in any country. Mansfield (1998) found that
13–15 % of new product introductions in seven industries could have been delayed
without the relevant academic research. In a similar vein, Nelson (1993) concluded that
Governance Structure and the Creation and Protection… 127
123
in industrial sectors such as the chemical, pharmaceutical, and electronics sectors, the
countries with the most competitive firms were those that also had strong academic
research programs in those arenas. Since collaborations between industries and
academic institutions constitute great channels for academic R&D spillovers and
commercialization, governments around the world by all means encourage such
collaborations (Mowery 2011). However, previous studies have also suggested that
industry-academic collaborations usually require higher flexibility because of the
divergence in long-term orientation between firms and academic institutions (Busom
and Fernandez-Ribas 2008). Firms can also conflict with academic institutions over the
topics, the timing and the form of disclosure of R&D activities (Bruneel et al. 2010).
Although many academic institutions are shifting from long-term research to
near-term research and commercialization of research outputs as a result of the
reduction in public funding (Cohen et al. 1994; Mansfield 1998), academic
institutions as a whole are not primarily profit-driven. Their incentives for
misappropriating the proprietary assets of the JVs would be lower than those of
profit-driven firms (Martinez-Noya et al. 2013). In addition, since academic
institutions often lack the complementary facilities (e.g., manufacturing plants,
supply chains, selling channels) needed to exploit the proprietary assets of the JVs,
their capabilities for misappropriation are also likely to be lower (Martinez-Noya
et al. 2013; Teece 1986). Therefore, selecting academic institutions as partners in
R&D JVs help reduce the concern over knowledge protection of MNEs.
Reducing the risk of knowledge misappropriation, choosing academic institutions
as JV partners diminishes the importance of using EJVs for the purpose of
knowledge protection. In addition, due to the divergence in long-term orientation
between firms and academic institutions, a more flexible governance structure, such
as CJV, is usually preferred in industry-academy collaborations (Bruneel et al.
2010; Busom and Fernandez-Ribas 2008; De Fuentes and Dutrenit 2012).
Therefore, by choosing academic institutions as partners and adopting a contract-
based governance structure, not only can MNEs protect knowledge outcomes from
misappropriation, they can also take advantage of investment flexibility which
usually benefits industry-academy collaboration.
Hypothesis 2 (H2): Ceteris paribus, when a foreign firm chooses academic
institutions rather than local firms as JV partners, the EJV mode is less likely
to be chosen for the R&D JV.
2.4 The Moderating Effect of Cultural Distance on Governance StructureChoice
There is an ongoing debate about the direct impact of cultural distance on
governance structure (Anderson and Gatignon 1986; Kogut and Singh 1988;
Hennart and Larimo 1998; Makino and Neupert 2000). Contradictory theoretical
arguments exist and the empirical findings are mixed (for a review see Zhao et al.
2004). In this research, the direct effect of cultural distance on entry mode choice
also tends to be ambiguous: on the one hand culturally distant MNEs find EJVs
128 J. Li, Z. Xie
123
more costly to run, on the other hand they face higher risk of knowledge
misappropriation and have to use EJVs for the purpose of knowledge protection.
A key difference between CJVs and EJVs lies in that an EJV involves semi-
hierarchical governance which is characterized by a higher level of behaviour
control while a contractual relationship is more concerned about outcome control.
Compared with outcome control, behaviour control involves more frequent
personnel communications and interactions, which is especially difficult and costly
in the absence of shared language, traditions, ways of thinking, and values
(Anderson and Gatignon 1986; Evangelista and Hau 2009). In addition, without
shared values it is also difficult for EJVs to align the interests of partners, as they
may value different things. Hence cultural distance makes EJVs more risky and
costly than CJVs (Pothukuchi et al. 2002).
At the same time, in emerging economies where the concern over knowledge
protection is salient, MNEs may have to tolerate the high risk and cost associated
with cultural distance and to choose EJVs in order to better protect their
technological competencies. In the current empirical context, MNEs with a larger
cultural distance from emerging economies are more likely to originate from better
developed countries and carry more advanced and mature technology which is
more likely to be subject to misappropriation. Therefore, culturally distance MNEs
may have to use EJVs to protect their knowledge in spite of its high cost and risk. To
sum up, the direct relationship between cultural distance and EJVs is likely to be
ambiguous. However, a moderating effect tends to be clear. When the risk of
knowledge misappropriation is mitigated by limited R&D scope and appropriate
local partner choice, the drawbacks of EJVs such as high management cost and low
flexibility becomes a salient issue. Cultural distance further exaggerates such
drawbacks and makes EJVs even less attractive. Therefore, in the presence of a
large cultural distance, MNEs are less likely to select EJVs when the nature of
research activities or partnerships demands less safeguarding (i.e., research-
oriented R&D activities or academic institutions as partners).
Hypothesis 3a (H3a): Ceteris paribus, as the cultural distance between the
home country of an MNE and China increases, the relationship proposed in
H1 will be strengthened.
Hypothesis 3b (H3b): Ceteris paribus, as the cultural distance between the
home country of an MNE and China increases, the relationship proposed in
H2 will be strengthened.
Figure 1 summarizes these hypotheses.
3 Methods
3.1 The Chinese Context
This study focused on international R&D investments in China. China’s ample labor
supply and huge local market make it an attractive location for developing and
Governance Structure and the Creation and Protection… 129
123
leveraging technological competencies, but poor intellectual property rights
protection makes guarding technology challenging and costly. MNEs intending to
invest in R&D must design a mechanism to protect their technology assets while
avoiding the drawbacks of the mechanism.
China has emerged as a leading global production centre and is among the most
important markets for many companies. It is thus not surprising that foreign R&D
JVs are focusing heavily on problems particular to the local market (e.g., Chinese-
language computer use). At the same time, some of the R&D JVs are devoted to
basic research and thus contributing to their parents’ global operations (Zhang
2011). EJV and CJV are two of the three major forms of foreign direct investment
(FDI) prescribed by the Chinese government. An EJV in China is a limited liability
company where equity and board control is shared by two or more partners (Pan and
Tse 1996; Wang 2007). A CJV in China must have a joint subsidiary separate from
parents and a discrete task structure, taking the form of either a limited liability
company or an economic entity without independent legal person status (Inkpen
2000; Plasschaert 1993). The FDI regulations issued by the Chinese government
during the study period had restrictions on foreign partners’ equity shares in EJVs in
some industries, but had no restrictions on MNEs’ choice over CJVs and EJVs.
Industry-academy collaborations through either CJVs or EJVs are widely observed
in China (Chinese Association of University-Run Industries 2001; Shapira and
Wang 2009).
Based on the regulations on Chinese-Foreign EJVs, if MNEs choose to invest as
an EJV, they have to take at least a 25 % share. In addition, the law provides veto
rights to minority shareholders when important decisions (e.g., the restructuring and
dissolution of an EJV) are made by the board. These measures were intended to
make sure that MNEs investing in an EJV in China are committed to the
relationship, and that minority shareholders are protected.
Fig. 1 Theoretical framework
130 J. Li, Z. Xie
123
3.2 Data and Sample
To examine the factors affecting the choice of R&D governance structure in China,
we developed a database from four data sources: China Business Review, Business
China, and the LexisNexis and Proquest databases. China Business Review is a
major bimonthly trade magazine published by the US-China Business Council, an
independent business association headquartered in Washington D.C. Data from this
source has been widely used in other international business research (e.g., Hu and
Chen 1993; Li and Zhong 2003; Pan and Tse 2000). The information from the four
data sources was cross-checked for accuracy. A careful review of these sources
uncovered 347 instances of foreign R&D JVs in China between 1995 and 2002
inclusive. After dropping the observations with missing data, 319 cases were
included in the analysis.
The R&D investments during the study period were spread across 14 industries
and 22 Chinese provinces. A majority were in technology-related industries such as
electronics or computer software (101 cases, 31.7 %) or in telecoms and the internet
(137 cases, 42.9 %). Major cities such as Beijing (48.3 %) and Shanghai (14.7 %)
attracted a large proportion of the investments. The investing firms came from 21
different countries, with over a half from the US (55.8 %).
3.3 Variables
The dependent variable in this study is equity JV governance structure, represented
by a dummy variable coded as ‘‘1’’ if the R&D investment was organized as an EJV
by the foreign investor and ‘‘0’’ for other arrangements. As many as 142 (44.5 %) of
the R&D JVs in the sample were EJVs.
There are three independent variables. The research orientation of an investment
was represented by a dummy variable coded according to its publicly stated
objective. The variable research-oriented was coded as ‘‘1’’ if the investment was
announced as being focused on basic research and as ‘‘0’’ for development-oriented
work. We first developed a coding sheet with key words for either development
focused activities (e.g., develop a specific product; develop an application solution)
or research focused (e.g., joint research, research collaboration), based on a content
analysis and prior literature. Two researchers independently coded each invest-
ment’s primary focus based on published information, company websites, and in
some cases, phone interviews with R&D directors and country managers. Through
subsequent comparisons and discussions, the two researchers reached consensus in
each case. Among the 319 investments, 81 (25 %) were considered research-
oriented.
The choice of local partner for an international R&D JV, that is, whether the local
partner was an academic institution or a local firm, was measured by the variable,
academic institution. This variable was coded as ‘‘1’’ if the local partner was an
academic institution (i.r., a university or research institute) and as ‘‘0’’ otherwise. In
42 (13.2 %) of the R&D JVs, academic institutions were chosen as partners by
MNEs.
Governance Structure and the Creation and Protection… 131
123
Following Kogut and Singh (1988), cultural distance was calculated as a
composite index using Hofstede (1980) four dimensions of culture:
CDj ¼P4
i¼1
Iij � Iic� �2
=Vi
h i=4, where Iij is Hofstede’s index of the ith cultural
dimension for the jth country, and Vi is the variance of the index of the ith
dimension. The subscript c indicates China, and CDj is the cultural distance between
the jth country and China.
Three groups of control variables were also included in the models. The first
group contained four transaction-level factors. To capture the host country
experience of MNEs, we measured (1) whether the focal investment is the first
R&D investment the MNE parent made in China, and (2) whether or not the foreign
parent had made any wholly-owned R&D investments in China prior to the focal
one. If the focal investment is the first R&D investment of the foreign parent, it was
coded as a dummy variable. Due to an intra-organizational imprinting effect, MNEs
which had used the wholly-owned entry mode before are thought to be likely to use
a similar equity-based entry mode again (Li and Yao 2010; Lu 2002). Prior wholly-
owned R&D entry experience was coded as a dummy variable. If there was more
than one foreign organization participating in an R&D investment, the dummy
foreign R&D consortium was coded as ‘‘1’’, and as ‘‘0’’ otherwise. However, if there
were no local partners, the R&D lab was considered as wholly-owned by the foreign
investors, and was excluded from the sample. We measured the geographical
distance as the distance in kilometers between the capital of the province where the
international R&D JV was located and the capital of the home country of the MNE
making the R&D investment.
The second group of control variables described host locations. It has been found
that institutional development of intellectual property rights protection tends to
influence inbound FDI (Khoury and Peng 2011). So first the level of regional
intellectual property (IP) protection was measured at the provincial level. The
measure was adopted from the institutional development (ID) indices developed by
the National Economic Research Institute (NERI) of China (Fan and Wang 2001,
2004). ‘‘The indices reflect the development status of market trading mechanisms
and other institutions in achieving more efficient market functioning’’ (Gao et al.
2010, p. 386). The Institute reports the level of IP protection of each province
annually, calculated using data from the reports of China’s State Administration for
Industry and Commerce, survey data, and the China Statistical Yearbooks published
by the National Bureau of Statistics of China. The indices have been used in
economics, management and finance research on China (Chen et al. 2006; Gao et al.
2010; Li et al. 2006). The ID indices published by the NERI provide a relative rather
than an absolute measure of institutional development for each province (Fan and
Wang 2001, 2004). Since the NERI only reported the ID indices after 1997, the
values of IP protection in 1995 and 1996 were estimated based on the values in
1997. In addition to the institutional development, the economic development of
host locations was also captured in the model. Regional GDP per capita and annual
regional GDP growth in the 3 years before each transaction were calculated. The
data source was again the National Bureau of Statistics of China. The Chinese
132 J. Li, Z. Xie
123
government has been issuing special policies for some regions since 1980 to attract
FDI. The policies removed some of the foreign ownership restrictions in these
regions and tend to influence MNEs’ choices of governance structures. To control
for the regional policy effects, we generated a dummy variable special economic
zone that is coded as ‘‘1’’ if an international R&D JV is located in a Special
Economic Zone, a coastal open city, or a non-coastal city that enjoyed the special
policies for coastal open cities; and as ‘‘0’’ otherwise.
The third group of control variables were industry dummies. To control for
industry differences, we included two dummy variables—electronics and telecom-
munications—in the models. In fact, the investments were in 14 industries, but the
majority were in technology-related industries such as electronics and computer
software or telecommunications and the internet. Firms in these two industry groups
may prefer different governance structures. The last group of control variables
contained regional dummies and year dummies. Regional dummies controlled for
any other regional effect, with Beijing as the baseline. Year dummies captured any
possible year effect, with 1995 as the base year.
3.4 Models
Following prior entry mode studies, we used logit models to test the hypotheses,
which allows for the use of a binary dependent variable (Hennart and Reddy 1997).
This is necessary because the dependent variable equity JV is a dummy variable that
takes value 0 or 1. The potential shared error variance of all firms from a certain
home country may result in biased standard errors and reduce the efficiency of the
logit estimates. To account for the shared error variance problem, we applied logit
regression with clustering techniques in Stata. All the interaction items were
calculated with centered variables. Given that a number of other studies have used
probit models to deal with binary dependent variables (Barnett and Carroll 1987; Li
2008), we also used probit models and found similar results, which are thus not
reported here.
4 Results
Table 1 presents the relevant descriptive statistics and correlations. The highest
correlation among variables was found between cultural distance and geographical
distance (q = 0.67). This is to be expected as geographical distance is usually the
source of psychic distance (Davidson 1980). Since the average variance inflation
factor (VIF) of all the models was 3.22, multicollinearity was not considered an
important issue in these analyses (Ryan 1997).
Table 2 reports the results of logit regression with adjusted standard deviation.
Hypothesis 1 predicts that the choice of a research-oriented objective for the R&D
investment will reduce the likelihood that an EJV governance structure is selected.
The coefficients of research-oriented were significantly negative in all the models,
supporting Hypothesis 1 (p\ 0.01 in models 2, 4; p\ 0.05 in models 5–6;
p\ 0.10 in model 7). Hypothesis 2 predicts a negative relationship between the
Governance Structure and the Creation and Protection… 133
123
Table
1S
um
mar
yst
atis
tics
and
corr
elat
ion
mat
rix
Mea
nS
.D.
12
34
56
78
91
01
11
21
3
1.
Eq
uit
yJV
0.4
50
.50
2.
Res
earc
h-o
rien
ted
0.2
50
.44
-0
.16
*
3.
Aca
dem
ic
inst
itu
tio
n
0.1
30
.34
-0
.16
*0
.20
*
4.
Cult
ura
ld
ista
nce
4.7
41
.62
-0
.16
*0
.05
-0
.01
5.
Fo
reig
nR
&D
con
sort
ium
0.1
10
.31
0.0
7-
0.0
7-
0.1
4*
-0
.05
6.
Fir
stR
&D
inv
estm
ent
0.4
60
.50
-0
.02
0.0
2-
0.0
1-
0.2
6*
-0
.00
7.
Pri
or
wh
oll
y-
ow
ned
R&
Den
try
0.1
50
.36
-0
.15
*-
0.0
60
.04
0.1
9*
-0
.04
-0
.22*
8.
Reg
ion
alIP
pro
tect
ion
0.0
01
.00
0.1
2*
-0
.13
*-
0.0
8-
0.0
30
.06
-0
.10
-0
.00
9.
Reg
ion
alG
DP
per
cap
ita
1.5
40
.73
-0
.01
-0
.03
-0
.05
-0
.05
0.1
6*
0.0
70
.04
0.4
7*
10
.R
egio
nal
GD
P
gro
wth
30
.71
20
4.6
60
.04
-0
.04
0.0
00
.06
-0
.05
-0
.10
-0
.06
0.0
7-
0.1
1*
11
.G
eog
rap
hic
dis
tan
ce
88
34.0
63
96
5.0
9-
0.2
1*
0.0
5-
0.0
40
.67*
-0
.09
-0
.04
0.1
9*
-0
.04
-0
.07
0.0
2
12
.S
pec
ial
eco
no
mic
zon
e
0.7
10
.45
-0
.11
*0
.01
-0
.02
0.0
10
.05
0.0
50
.00
0.1
9*
0.5
7*
0.1
0-
0.0
4
13
. Tel
ecom
munic
atio
n
0.3
20
.47
-0
.08
0.0
2-
0.0
50
.10
-0
.09
0.0
20
.17*
-0
.07
-0
.00
0.0
00
.05
-0
.06
14
.E
lect
ron
ics
0.4
30
.50
0.0
9-
0.1
6*
-0
.00
0.0
10
.04
-0
.13*
0.0
60
.11*
0.0
40
.05
0.0
50
.09
-0
.59*
N=
31
9
*p\
0.0
5
134 J. Li, Z. Xie
123
Table
2R
egre
ssio
nre
sult
so
fth
elo
git
mod
els:
the
lik
elih
oo
do
fE
JVs
bei
ng
ado
pte
d
Mo
del
1M
odel
2M
od
el3
Mo
del
4M
odel
5M
odel
6M
odel
7
Independentvariables
Res
earc
h-o
rien
ted
(H1
)-
0.4
2(0
.14
)**
-0
.37
(0.1
4)*
*-
0.3
8(0
.19
)*-
0.3
4(0
.16
)*-
0.3
6(0
.20
)�
Aca
dem
icin
stit
uti
on
(H2)
-0
.42�(0
.23
)-
0.3
6�(0
.21
)-
0.3
5(0
.22
)-
0.5
0(0
.12
)**
*-
0.4
8(0
.13
)**
*
Interactioneffects
Res
earc
h-o
rien
ted
xC
D(H
3a)
-0
.77
(0.3
4)*
-0
.77
(0.3
9)*
Aca
dem
icin
stit
uti
on
xC
D(H
3b)
-0
.35
(0.1
0)*
**
-0
.36
(0.1
1)*
*
Controlvariables
Cult
ura
ld
ista
nce
(CD
)0
.05
(0.1
6)
0.0
7(0
.17
)0
.02
(0.1
5)
0.0
3(0
.15
)0
.25
(0.1
4)�
0.0
4(0
.16
)0
.24
(0.1
5)
Fo
reig
nR
&D
con
sort
ium
0.1
8(0
.34
)0
.16
(0.3
2)
0.0
5(0
.33
)0
.06
(0.3
2)
0.0
8(0
.22
)0
.11
(0.3
2)
0.1
3(0
.33
)
Fir
stR
&D
inv
estm
ent
0.2
0(0
.29
)0
.19
(0.2
9)
0.2
1(0
.27
)0
.20
(0.2
7)
0.1
8(0
.30
)0
.16
(0.2
9)
0.1
4(0
.32
)
Pri
or
wh
oll
y-o
wn
edR
&D
entr
y-
0.5
3(0
.42
)-
0.6
2(0
.42
)-
0.5
0(0
.45
)-
0.5
9(0
.45
)-
0.6
4(0
.47
)-
0.6
3(0
.49
)-
0.6
8(0
.53
)
Reg
ion
alIP
pro
tect
ion
-0
.20
(0.1
3)
-0
.31
(0.1
2)*
*-
0.2
3�
(0.1
4)
-0
.33
(0.1
3)*
-0
.37
(0.1
6)*
-0
.25
(0.1
1)*
-0
.30
(0.1
4)*
Reg
ion
alG
DP
per
capit
a0
.36
(0.4
7)
0.2
1(0
.43
)0
.44
(0.5
0)
0.3
1(0
.42
)0
.49
(0.5
2)
0.3
0(0
.45
)0
.51
(0.5
8)
Reg
ion
alG
DP
gro
wth
0.0
0(0
.00
)0
.00
(0.0
0)
0.0
0(0
.00
)0
.00
(0.0
0)
0.0
0(0
.00
)0
.00
(0.0
0)
0.0
0(0
.00
)
Geo
gra
ph
icd
ista
nce
0.0
0(0
.00
)**
*0
.00
(0.0
0)*
**
0.0
0(0
.00
)**
*0
.00
(0.0
0)*
**
0.0
0(0
.00
)***
0.0
0(0
.00
)**
*0
.00
(0.0
0)*
**
Sp
ecia
lec
on
om
iczo
ne
-0
.97
(0.2
9)*
**
-1
.00
(0.2
7)*
**
-0
.97
(0.2
8)*
**
-1
.00
(0.2
7)*
**
-1
.06
(0.2
8)�
-1
.05
(0.2
6)*
**
-1
.13
(0.3
1)*
**
Con
stan
t1
.70
(1.3
0)
1.9
9(1
.14
)�1
.88
(1.3
1)
2.1
2(1
.12
)�2
.05
(1.1
1)�
2.4
6(0
.98
)*2
.39
(0.9
3)*
Industry
effects,yeareffect
andregionaleffectsincluded
Lo
gli
kel
iho
od
-1
82
.00
-1
77
.74
-1
78
.02
-1
74
.91
-1
72
.14
-1
71
.50
-1
68
.93
Chi
squ
are
74
.37
**
*8
2.9
1*
**
82
.34
**
*8
8.5
6*
**
94
.09
**
*9
5.3
9*
**
10
0.5
1*
**
Chi
squ
are
chan
ge
vs.
bas
elin
e8
.53
**
Mo
del
1
7.9
7*
*
Mo
del
1
14
.18
**
*
Mo
del
1
5.5
3*
Mo
del
4
6.8
3*
*
Mo
del
4
11
.95
**
Mo
del
4
N=
31
9.�p\
0.1
0;
*p\
0.0
5;
**p\
0.0
1;
**
*p\
0.0
01
.T
he
stan
dar
der
rors
adju
sted
for
ho
me
cou
ntr
ies
are
inth
ep
aren
thes
es
Governance Structure and the Creation and Protection… 135
123
choice of academic institutions as JV partners and the selection of an EJV
governance structure. Again the models provided support to Hypothesis 2. The
coefficient for academic institution was negative and marginally significant at the
10 % level under models 3–4, and significantly negative at the 0.1 % level under
models 6–7. In combination, the results supported the idea that MNEs consider the
EJV governance structure as only one of several mechanisms for protecting
technological competencies.
The moderating effects of cultural distance in Hypothesis 3a–3b were also
supported. The coefficient of the interaction between research-oriented and cultural
distance was significantly negative in model 5 (b = -0.77, p\ 0.05) and Model 7
(b = -0.77, p\ 0.05). The coefficient of the interaction between academic
institution and cultural distance was significantly negative in model 6 (b = -0.35,
p\ 0.001) and model 7 (b = -0.36, p\ 0.01). Hoetker (2007) encouraged the use
of graphical presentations in interpreting the results of logit regressions. The
predicted probabilities of EJV adoption as functions of research-oriented and
academic institutions and their interaction effects with cultural distance are
illustrated in Figs. 2 and 3. Except for the interacting variables, the predicted
probabilities of EJV adoption in both figures was calculated with all dummy
variables as the most frequent value and all continuous variables as their mean. The
figures showed that the probabilities of EJV adoption decreased when research-
oriented R&D activities were conducted in the JV, and when the local partner was
academic institutions rather than firms. Large cultural distance enhanced the
negative effects.
The nonlinearity of logit models means that ‘‘the relationship between a change
in the value of an independent variable and the estimated change in the probability
of a positive outcome cannot be directly discerned from the variable’s coefficient’’
(Zelner 2009, p. 1336). In order to count for this problem, a simulation-based
Fig. 2 The interaction effect of research-oriented and cultural distance on the likelihood of EJVs beingadopted
136 J. Li, Z. Xie
123
approach was suggested as a better way of interpreting the estimation results of logit
models by reporting differences in predicted probabilities associated with discrete
changes in key independent variable values (Zelner 2009). Figure 4 and 5 was
created with such an approach, showing the difference in predicted probabilities of
EJV adoption associated with a shift from the choice of R&D scope and JV partners
at different levels of cultural distance, along with the 95 % confidence interval for
this difference. Figure 4 indicated that, even though the estimated effect of
research-oriented on the probability of EJV adoption is negative, this effect is not
Fig. 3 The interaction effect of academic institution and cultural distance on the likelihood of EJVsbeing adopted
-.20
.2.4
.6.8
1
dpr (
EJV)
0 2 4 6 8cultural distance
Fig. 4 The differences in predicted probabilities of EJV adoption associated with shifting fromdevelopment-oriented R&D activities to research-oriented R&D activities at different levels of culturaldistance
Governance Structure and the Creation and Protection… 137
123
statistically significant at lower values of cultural distance because the 95 %
confidence interval includes zero. In contrast, at higher levels of cultural distance,
the effect of choosing research-oriented R&D activities is negative and significantly
different from zero. Similar pattern was found in Fig. 5. More detailed calculation
showed that the choice of research-oriented R&D activities and academic
institutions as partners led to significant decrease in the probability of EJV
adoption when cultural distance exceeds 4.34, which covered 83.70 % of all the
observations. This delivered a general support to Hypotheses 1, 2. The lack of
significance in the range of lower values of cultural distance tends to be due to
limited number of observations with lower values of cultural distance (King et al.
2000).
The null hypothesis of Hypothesis 3a is that the effect of the choice of research-
oriented R&D activities on EJV adoption when cultural distance is low (e.g.,
min = 1.02) is not smaller than that when cultural distance is high (max = 8.28). A
two-tailed test showed that the 95 % confidence interval of the difference between
the two effects is between -1.01 and -0.00, which rejected the null hypothesis and
delivered support to Hypothesis 3a. The same test was applied to Hypothesis 3b.
The 95 % confidence interval of the difference between the effect of choosing
academic institutions as partner on EJV adoption when culture distance is low and
the effect when cultural distance is high is (-1.17, -0.01). Again, the result
supported Hypothesis 3b. To sum up, all of our hypotheses were generally
supported.
Most of the control variables did not show significant effects on the dependent
variable. In fact, only geographic distance and special economic zone exhibited
consistent impacts. The estimate of the coefficient of geographical distance was
significantly positive (p\ 0.001). This showed that MNEs from home countries
more distant from China preferred EJVs. The significantly negative impact
(p\ 0.001) of special economic zone was a little surprising. It seems that MNEs
-.20
.2.4
.6.8
1
dpr(
EJV
)
0 2 4 6 8cultural distance
Fig. 5 The differences in predicted probabilities of EJV adoption associated with shifting from choosingfirms as partners to choosing academic institutions as partners at different levels of cultural distance
138 J. Li, Z. Xie
123
were more likely to form contractual R&D JVs in regions with less restriction on
FDI. A possible explanation is that in special economic zones the market institution
is better developed and MNEs found it easier to establish and manage contractual
relationships there. The negative impact of regional IP protection was significant
(p\ 0.05) in all models with research-oriented included. This indicates that MNEs
could replace an internal knowledge-protection mechanism (EJVs in this case) with
an external knowledge-protection mechanism (IP protection in this case) when the
latter is available.
5 Discussion and Conclusion
Multinationals in recent years have paid increasing attention to overseas knowledge
creation while reducing the use of equity ownership in overseas knowledge
protection (Koza et al. 2011). Because of the generally weak institutions in
emerging economies, how MNEs can protect their technological competencies
becomes a critical issue for both scholars and managers.
In this study, we have examined how the scope of the R&D JV and the nature of
the local partner may influence the choice between the equity and non-equity
governance structures for R&D JVs. We argue that the risk of knowledge
misappropriation is reduced when MNEs limit the scope of R&D activities to
research-oriented ones, or when academic institutions are chosen as local partners.
In these two cases, it is less likely that EJVs would be adopted as a knowledge
protective measure. One factor explaining the above negative effects might be the
limitation of EJVs in flexibility and adaptability, which are critical for knowledge-
creation in large emerging economies. CJVs as an alternative to EJVs work well in
managing the tension between knowledge creation and protection when the risk of
knowledge misappropriation is mitigated.
In addition, we examined MNEs’ heterogeneity in selecting a CJV rather than an
EJV when the risk of knowledge misappropriation is reduced. Since the cost and
difficulty of managing an EJV increase with the cultural distance between the
MNE’s home and host countries, for those MNEs that have limited the scope of the
R&D JVs to research-oriented activities and those have chosen academic
institutions as local partners, the likelihood of adopting EJVs is substantially
reduced when the cultural distance is large. This extended the previous work (e.g.,
Li et al. 2008; Zhao 2006).
Highlighting the importance of knowledge protection in the context of emerging
economies, this paper does not ignore the importance of knowledge creation. A CJV
offers an attractive governance structure for international R&D JVs because of its
flexibility and responsiveness. The main disadvantage of a CJV lies in its poor
knowledge protection. Therefore, we argue that international R&D JVs choose
CJVs when (1) risk of knowledge misappropriation is mitigated and (2) flexibility is
critical in the partnership. Research-oriented R&D activities involve high uncer-
tainty but low resource commitment, which calls for and allows for higher flexibility
in governance structure. Similarly, academic partnerships require higher flexibility
due to the divergence in long-term orientation between firms and academic
Governance Structure and the Creation and Protection… 139
123
institutions. CJVs are more effective structure in organization knowledge creation
when the R&D JV is dedicated to research-oriented activities or when academic
partners take part in.
In building this framework we aim to contribute to three literatures. First,
knowledge protection literature extensively discussed various modes of knowledge
protection mechanisms (e.g., patents, design registration, trademarks, trade secrecy,
lead-time advantages, design complexity, control allocation and interests alignment,
etc.), and how they can be complementary, substitutes or independent of each other
(Amara et al. 2008; Kloyer and Scholderer 2012; Thoma and Bizer 2013). It also
found that R&D internationalization increases the risk of knowledge misappropri-
ation (Berger et al. 2012), and inter-organizational collaboration tends to influence
the choice of knowledge protection mechanism (Kloyer and Scholderer 2012;
Leiponen and Byma 2009). These findings create spaces for research on complex
knowledge protection mechanisms in the context of international R&D collabora-
tion. Our research attempts to step into this niche and explores how EJV as a
knowledge protection mechanism are adopted or replaced with CJV for the purpose
of both knowledge protection and knowledge creation.
Our second contribution was made to entry mode literature. We have identified
the objective (be it research- or development-oriented) of an R&D venture as a key
factor influencing the choice of entry mode. Although the choice of R&D objective
is an important aspect of a global R&D strategy, this topic has not received adequate
academic attention. Limited prior research has examined the influence of R&D
objectives on the choice of entry mode. In addition, we have identified partner
selection as a key factor influencing the choice of R&D FDI entry mode. Prior
research concludes that the type of partner is a major factor determining the success
and failure of R&D collaborations (Belderbos et al. 2004; Fritsch and Lukas 2001;
Fritsch and Franke 2004; Lhuillery and Pfister 2009; Tether 2002). Different types
of partners possess different resources and capabilities and may behave differently
in R&D collaborative relationships (Kang and Kang 2010). However, research
focusing on partner selection for international R&D JVs (e.g., universities versus
local firms) is still in the embryonic stage (Cohen et al. 2002; Li 2010; van Beers
et al. 2008). The importance of industry-academy collaboration has greatly
increased in both industrialized and developing world over the last three decades
(Cohen et al. 2002; De Fuentes and Dutrenit 2012). As a result, the strategy of
having academic institutions as potential R&D JV partners has gained more
attention from scholars and companies alike. In this research, we suggest that
MNEs’ concern over the tension between knowledge creation and protection leads
them to favor academic institutions as partners in international R&D JVs as it
reduced the risk of knowledge misappropriation.
Another contribution of this research lies in our specific empirical context. The
internationalization of MNEs’ R&D investments into emerging economies has been
a recent phenomenon. Most emerging economies are characterized by frequent
changes in the regulatory framework and interferences from various governmental
authorities (Li and Yue 2008; Luo 2002). Property rights are either under-developed
or under-enforced (Jefferson and Rawski 1994). The tension between the creation
and the protection of technological competencies is especially strong in emerging
140 J. Li, Z. Xie
123
economies where the weak institutions make the protection of technological
competencies a very salient issue (Luo 2007; Zhao 2006). Previous research on
R&D globalization and decentralization has mainly focused on more developed
economies (Feinberg and Gupta 2004; Hansen and Lovas 2004; Papanastassiou and
Pearce 1999; Pearce and Papanastassiou 1996; Ronstadt 1978), with little attention
given to investing in R&D in emerging economies. Taking one of the largest
emerging economies, i.e. China, as an example, this study was intended to extend
previous work on this topic and build on some recent research on global R&D
investments in emerging economies (Keupp et al. 2009; Sun et al. 2010; Zhao
2006).
Although one of our main purposes of the paper is to extend the recent research
on global R&D investments in emerging economies (Mishra 2007), we believe that
the relationships we proposed in H2, H3 are generalizable to other economies, while
that proposed in H1 may be restricted to emerging economies where the problem of
knowledge misappropriation is salient. This is because limiting the scope of R&D to
research-oriented activities mitigates the difficulties associated with knowledge
protection as well as increases the concern over performance evaluation.
TCE argues that governance structures with high levels of control (e.g., EJVs)
can be used to deal with two governance problems—the performance evaluation
problem and the safeguarding problem (Rindfleisch and Heide 1997). The input and
output of development-oriented R&D activities are more likely to be misappropri-
ated by transaction parties in emerging economies. So EJVs are more likely to be
used to govern development-oriented R&D activities in order to minimize the
safeguarding problem caused by the opportunism of transaction parties.
However, just as development-oriented R&D activities are subject to a more
serious safeguarding problem, research-oriented R&D activities are subject to a
more serious performance evaluation problem. Compared with development-
oriented R&D activities, it might be more difficult to specify the input and output of
research-oriented R&D activities in a contract. This leads to the performance
evaluation problem, which can be countered by using EJVs to minimize the
opportunism of transaction parties.
We argue that in our research context, the safeguarding problem is more salient
than the performance evaluation problem for two reasons. First, the performance
evaluation problem associated with research-oriented R&D activities is reduced
since MNEs have superior technological capabilities and local partners mainly
provide human resources and tangible assets (Hitt et al. 2000; Yan and Gray 1994).
It is relatively easier for MNEs to evaluate these input and performance of local
partners. Second, the safeguarding problem associated with development-oriented
R&D activities is enhanced when (1) the R&D is close to the market, (2) the partner
has complementary assets, and (3) the host institution is weak in IP protection.
These conditions usually hold in emerging economies such as China.
To sum up, research-oriented R&D activities are subject to the performance
evaluation problem, while development-oriented R&D activities are subject to the
safeguarding problem. Both governance problems can be dealt with by adopting
EJVs. The relationship proposed in Hypothesis 1 tends to hold when the
Governance Structure and the Creation and Protection… 141
123
safeguarding problem is more salient, which is usually the case in emerging
economies rather than developed economies.
Another note to make here is that the low correlation between the two
independent variable, i.e. q = 0.20 between research-oriented and academic
institution, implies that MNEs collaborate with Chinese academic institutions not
just for research-oriented R&D activities. This counterintuitive evidence may be
specific to the national innovation system in China, which has also been found in
Finland (van Beers et al. 2008). It shows that the empirical support we found for our
two main hypotheses are not spurious relationships due to high correlations between
independent variables.
6 Implications and Limitations
‘‘…the last activity of the firm to be organised on an international basis—if it is at
all—is R&D’’ (Terpstra 1977, p. 25). The above assertion was mainly based on a
knowledge protection logic, i.e. technological competencies lie in the core
competencies of MNEs, which can be best protected by full internalization in
headquarters (Pisano 1990). However, this contradicts the need of better knowledge
creation by getting access to richer and more diverse technological resources. To get
access to overseas technological resources as well as protect the technological
inputs and outputs, it has been argued that EJVs have advantages in governing
transactions with overseas R&D investments because (1) they provide better
protection of knowledge and (2) they facilitate knowledge transfer between partners
(Hennart 1988). So we had expected the governance structures of international R&D
JVs to be predominantly EJVs. But it turned out that less than half (45 %) of the
international R&D JVs in our sample were EJVs. If EJVs are so suitable for R&D
JVs, why aren’t more JVs organized as such?
We explained this with the EJV’s limitation in flexibility and adaptability,
together with its high management cost. The literature on the choice of governance
structure for knowledge-intensive transactions has not paid adequate attention to
this side of the story. This paper suggests that the said disadvantages of EJVs may
outweigh its advantages in knowledge protection, in particular when the risk of
knowledge misappropriation is relatively low and when the drawbacks of EJVs are
very salient. Though the reduction in use of equity-based governance structure is
prevailing in FDI worldwide recently, we suggest that it tends to be more significant
when the following two conditions hold: (1) alternative investment arrangements
(e.g., choice of appropriate business scope and local partners) that favour flexibility
in governance structure mitigate the risk of knowledge misappropriation, and (2) the
organizational cost of equity-based governance structure are especially high due to
factors such as cultural distance.
This paper emphasizes the role of host institutions in balancing knowledge
protection and knowledge creation in international R&D JVs. In emerging
economies, the weak IP protection makes knowledge protection a very salient
issue, while the huge and changing global market makes organizational flexibility
and adaptability crucial for successful knowledge creation. Improved IP protection
142 J. Li, Z. Xie
123
and a more stable global market may alleviate the tension between knowledge
protection and knowledge creation, and further reduce the substitution effects we
observed in the current empirical context.
Our research gives the following managerial implications. First, the findings
suggest that the choice of governance structure for international R&D JVs should
not be isolated from other relevant decisions over the JV setup, such as whom to
partner with and what types of R&D activities to conduct. Second, managers who
are worried about knowledge misappropriation hazards in weak institutions do not
have to rely on transaction internalization to protect their knowledge. Limiting the
scope of business activities and choosing an appropriate partner may mitigate the
risk of knowledge misappropriation. Third, the cost of EJVs should never be
underestimated, especially when the cultural distance between the host and home
countries is large.
One important limitation of the current work is that it only focused on MNEs’
willingness to choose a certain governance structure, but ignored their ability to
actually implement that structure. Firms may not always be able to put the optimal
strategy into practice. Due to the lack of other firm-level data (e.g., the size of the
investment, and the size, R&D intensity and internationalization level of all parties
involved in an JV), we could not examine the ability of MNEs and local partners to
set up JVs with a certain governance structure. To counter that, we included the
regional economic development variables (i.r., regional GDP per capita and annual
regional GDP growth) in the models as control variables, expecting local partners
from more developed regions to be more capable of realizing synergies with MNE
partners. Unfortunately, none of the regional economic development variables
showed a significant impact on the choice between EJVs and CJVs.
A second limitation lies in the possible alternative explanations for our findings.
EJVs and CJVs differ in many other ways besides the level of knowledge protection.
For example, the cooperation synergies they are able to deliver to JVs would be
different (Phene and Tallman 2012). If CJVs create more JV synergies than EJVs
when the investment is research-oriented and academic institutions are chosen as the
local partners, similar results would be obtained. Unfortunately, given the current
data and literature we are unsure whether EJVs or CJVs create more JV value. This
should be a promising area for future research. Another field for future research lies
in testing the generalizability of our findings. It is important to examine if the results
hold in other emerging economies, or even in developed countries.
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