Real options and the instability of international joint ventures

This dissertation studies the impact of organizational learning and knowledge transfer on the instability of international joint ventures (IJVs) by using game theory and real options theory. First, a game theoretical model is used to examine why the instability rates of IJVs are particularly high in developing countries, as well as to identify the conditions under which foreign firms transfer less advanced technologies to IJVs. Using this model, primary influences on the stability of IJVs include: local government policy changes regarding ownership restrictions on foreign firms; acquisition of knowledge among IJV partners; and changes in competitive threats from local markets. Several IJVs in China are highlighted to illustrate these influences. Second, a real options model is employed, and the ensuing results can be applied to international and domestic joint ventures in both developing and developed countries. This model considers uncertainties facing IJV partners, as well as organizational learning and knowledge transfer, to capture the dynamic contributions of an IJV to each partner. This model employs simulation techniques and provides rationale for different forms of IJV instability. Partners are inclined to dissolve an IJV when the IJV does not adequately provide synergy or learning opportunities for them; one partner tends to acquire the other partner's equity when the former has significant advantage in its cost of operating the IJV or in its knowledge acquisition capability. Factors that influence an IJV's option value are also identified. Finally, empirical evidence is presented to support these results based on an exploratory survey analysis. A logit regression was undertaken to study how firms' perceptions of joint venture synergy and learning opportunities affect their decisions to continue or terminate a joint venture.