The influence of cultural and institutional differences on control choices in alliances

© 2016 Dr. Wei ZengIn this study, I investigate the determinants of management controls in cross-border alliances. A key feature of cross-border alliances is the cultural and institutional differences that exist between collaborating firms. I examine the influence of cultural and institutional differences on the use of specific control mechanisms in cross-border alliances. In addition, I examine the influence of cultural and institutional differences on the level of residual risk that collaborating firms are willing to accept when designing management control systems. Drawing on new institutional economics, I argue that cultural and institutional differences influence the use of specific control mechanisms, over and above transaction characteristics. Drawing on transaction cost economics, I argue that collaborating firms are likely to accept higher residual risks in alliances with greater cultural and institutional differences. Survey data are obtained from Australian firms engaged in alliances. I use a multi-country approach to exploit variance in institutional and cultural differences. Based on the variance, 111 alliances are classified into cross-cultural alliances (CCAs) and non-cross-cultural alliances (NCCAs), to capture cultural and institutional differences. I use seemingly unrelated regression to test the differences in the use of outcome controls, behavior controls, and collaborative practices between CCAs and NCCAs, controlling for a set of transaction characteristics. I use a MANOVA to test the differences in the level of residual risks between CCAs and NCCAs. I find support for a higher level of behavior controls and a lower level of collaborative practices in CCAs that in NCCAs. I find no evidence of the differences in the level of outcome controls between CCAs and NCCAs. Further, this study provides preliminary evidence that cultural differences and institutional differences have similar but independent associations with behavior controls (positive) and collaborative practices (negative). Together, these findings indicate that cultural and institutional differences can have incremental effects on control choices, over and above the effects of transaction characteristics. I find no evidence of the differences in the level of residual risks between CCAs and NCCAs. I do find preliminary evidence to suggest that where firms in CCAs underinvest in controls, they are more likely to accept higher residual risks. Together, these findings indicate that firms collaborating in alliances with greater cultural and institutional differences are likely to accept higher residual risks in some circumstances. This study contributes to the literature by providing a better understanding of the determinants of management controls in cross-border alliances and the way in which collaborating firms use control choices to manage cultural and institutional differences