Profitability of Joint Ventures Abroad: Explaining a New Empirical Puzzle
We explore empirical patterns in the profitability of foreign affiliates of US multinational companies (MNCs). Historically, affiliates that were organized as 50/50 or minority-owned joint ventures (JVs) have been less profitable than their majority- and wholly owned ventures. The latter had roughly a 6 percent return on assets from the 1970s to the 1990s, compared to 4 percent for the joint ventures. This pattern held across most industries and regions, though the size of this “profitability gap” varied. In the 2000s, this profitability gap narrowed and even reversed itself in some years, regions, and sectors. To explain these patterns, we propose a simple model based on economics of project finance, classic FDI theory, and a combination of the resource-based and transaction-cost theories of the firm. We argue that both the ownership structure and the profitability of a foreign venture are determined by the resources of the MNCs and of potential host-country partners. The profitability gap then shows the revealed competitive advantage of US MNCs vis-à-vis local firms. We consider alternative explanations, which we do not think explain the full pattern observed.
|Cambridge University Press|
|Organisation||Incae Business School|
Gomes-Casseres, B., Jenkins, M, & Zámborský, P. (2019). Profitability of Joint Ventures Abroad: Explaining a New Empirical Puzzle. In Frontiers of Strategic Alliance Research: Negotiating, Structuring and Governing Partnerships (pp. 322–336). Cambridge University Press. doi:10.1017/9781108236188.020