Determinants of International Joint Venture Termination Mode Choice: a Multiple Case Study

Abstract

Globalization pushes firms to go international. International joint venture (IJV) is an important mode to enter into international markets. However, termination rate of IJVs is very high. Prior research has very limitedly focused on the termination modes choice of IJVs. Therefore, the main purpose of this thesis is to find out determinants of IJV termination mode choice. Theoretical framework of this study is developed by using divestment theory, liability of foreignness (LOF) and foreign direct investment (FDI) motive theory. Developed framework involves four level factors which influence the termination mode choice, namely, firm, IJV, inter-partner and host country level factors. Framework is tested by qualitative multiple case data. The data is collected from three companies that have terminated their IJVs by acquisition, sell-off or closure. The study finds that 17 out of 26 identified determinants explain the case companies’ termination mode choice. However, only ten of them were important for the IJV termination mode choice. IJV was terminated via acquisition when IJV was profitable for the entire time of the implementation, the parent firm was willing to expand the presence in the target country, acquisition was prescribed in IJV formation contract, the parent firm had previous Merge and Acquisition (M&A) experience, IJV was from the same industry as parent firm, parent firm had the majority equity of IJV and the parent firm support to the IJV was high. Further, high political instability in the target country, strategy instability of the parent firm, M&A experience, parent firm lack of expand, equal-IJV and un-related IJV industry explained the choice of sell-off IJV termination mode. In addition, lack of parent firm M&A experience and expansion desire, high political risk, and small size of IJV explained the choice of closure IJV termination mode. However, it is found that inter-partner related factors are not important in explaining the IJV termination mode choice. In addition, findings show that carefully crafted contracts that specify the IJV termination mode also guides the future termination mode choice of IJV. These findings help managers to better understand the factors that explain the choice of IJV termination mode.