Equity Joint Ventures and the Theory of the Multinational Enterprise

Abstract. This paper extends the internalization approach to the theory of the multinational enterprise (MNE) to include an expanded role for equity joint ventures. Using the transaction cost paradigm of Williamson, this paper explains why joint ventures may sometimes be preferred over wholly owned subsidiaries. Also presented is empirical work on joint-venture performance in developing countries which demonstrates that under certain conditions joint ventures can be the optimal mode of foreign direct investment. Joint ventures are the dominant form of business organization for multinational enterprises in the developing countries (Vaupel and Curhan 1973), and are frequently being used by Fortune 500 companies in the developed countries (Janger 1980; Harrigan 1985). In fact, for U.S.-based companies, all cooperative arrangements (involving such things as licences or local shareholders) outnumber wholly owned subsidiaries by a ratio of 4 to 1 (Contractor and Lorange 1987). MNEs often prefer joint ventures over wholly owned subsidiaries regardless of whether or not they are required by a host country as a condition of entry (Beamish 1984). Nevertheless, fairly limited consideration has been given to the rationale for equity joint ventures in the theory of the multinational enterprise. While recent theoretical contributions utilizing the internalization approach have significantly advanced our understanding of MNEs (Buckley and Casson 1976