ASIA PACIFIC JOURNAL OF MANAGEMENT VOL. 6, N O . 2 : 225-242 Japanese Joint Ventures With Western Multinationals: Synthesising the Economic and Cultural Explanations of Failure Lee T. Brown, Alan M. Rugman, and Alain Verbeke* Many research studies have been done to explain the reasons for the tensions and failures observed in joint ventures between Japanese and Western multinational enterprises. These studies have identified, with various degrees of sophistication, the existence of cultural differences as a primary determinant of failure. Alternative explanations focus upon a transaction cost approach, emphasising opportunism and the danger of cheating in such strategic alliances. This paper synthesises the literature through the development of a new conceptual framework. This framework, which distinguishes between economic and cul- tural reasons for failure, provides a new lens to view the literature. It is demonstrated that the simple view of cultural incompatibility needs to be replaced by an awareness of th e combined impact of cultural and econom ic forces on the viabilit y of joint ventures between Japanese and Western firms. JAPANESE AND WES TERN JOINT VENTU RE PARTNERS Since the 1960s , joint ventures between firms of two diff erent national ities have increased dramatically, particularly between horizontall y-related firms (Hergert and Morris, 1988; Hani gan, 1988). American and European multina- tional enterprises (MNEs) have begun to link up with Japanese firms for joint ventures in the non-Japanese partner's home country, a significant departure from the previous trend, in which most transnational cooperative ventures with a Japanese partner were based in Japan. Japanese firm s are now seeking i nformation about circumvention of protectionist measures, knowledge of the local culture, and the access to distribution channels. Le e T. Brown is a doctoral candidate in the Faculty of Management at the University of Toronto. Alan M. Rugman is Royal Bank Visiting Professor at the University of Alberta an d Professor of International Business at the University of Toronto. Alain Verbeke is Assistant Professor of International Business at the University of Toronto. Helpful comments have been received from Nancy Adler, Mark Casson, Martin Evans, Tom Roehl, Mark Warner and Ken Watson. 22 5
ASIA PACIFIC JOURNALOF MANAGEMENT VOL.6, NO. 2 : 225-242
Japanese Joint Ventures WithWestern Multinationals:
Synthesising the Economic and CulturalExplanations of Failure
Lee T. Brown, Alan M. Rugm an,and Alain Verbeke*
Many research studies have been done to explain the reasons for the tensions and failuresobserved in joint ventures between Japanese and W estern multinational enterprises. Thesestudies have identified, with various degrees of sophistication, the existence of cultural
differences as a primary determinant of failure. Alternative explanations focus uponatransaction cost approach, emphasising opportunism and the danger of cheating in suchstrategic alliances. This paper synthesises the literature through the development of a newconceptual framework. This framework, which distinguishes between econom icand cul-tural reasons for failure, provides a new lens to view the literature.It is demonstrated thatthe simple view of cultural incompatibility needs to be replaced by an awareness of thecombined impact of cultural and econom ic forces on the viability of joint ventures betweenJapanese and Western firms.
JAPANESE AND WESTERN JOINT VENTURE PARTNERS
Since the 1960s, joint ventures between firms of two different nationalitieshave increased dramatically, particularly between horizontally-related firms(Hergert and Morris, 1988; Hanigan, 1988). American and European multina-tional enterprises (MNEs) have begun to link up with Japanese firms for jointventures in the non-Japanese partner's home country, a significant departure fromthe previous trend, in which most transnational cooperative ventures with aJapanese partner were based in Japan. Japanese firms are now seeking informationabout circumvention of protectionist measures, knowledge of the local culture,and the access to distribution channels.
Lee T. Brown is a doctoral candidate in the Faculty of Management at the Universityof Toronto. Alan M. Rugman is Royal Bank Visiting Professorat the University ofAlberta and Professor of International Business at the University of Toronto. AlainVerbeke is Assistant Professor of International Businessat the University of Toronto.Helpful com ments have been received from Nancy Adler, Mark Casson, Martin Evans,Tom Roehl, Mark Warnerand Ken Watson.
Japanese Joint Ventures: Brown, Rugman and Verbeke
Recently, complaints have been voiced that Japanese firms do not behave
ethically in cooperative arrangements. They "plan ahead to increase the benefitsthey extract from an alliance across the 'collaborative membrane', leaving theEuropean or American partner in a worse strategic position" (Contractor andLorang e, 1988, summ arising Hamel, Doz and Prahalad, 1986). In any attempt toassess the validity of the complaints against Japanese joint venture p artners, a verysalient issue must be considered. Due to the dramatic improvement of the Japa-nese economy since World War II, Japanese business has become surrounded bymyths in the West. Portrayed alternately as brilliant and disciplined or under-handed and dishonest, Japanese firms have come to be looked on as either thepotential saviours of sagging Western economies, or as a powerful menace.Commentators on Japanese-Western relationships have painted Japanese firms aseither smarter than their venture partners, or as intentionally unethical. Rarely, if
at all, has the argument been m ade that a mixture of economic and cultural factorsmay be responsible for the lack of satisfaction w ith Japanese firms as joint venturepartners, and that some of these contextual factors may be alterable. This is theperspective that will be explored in this paper.
Specifically, several questions will be addressed: Do Japanese firms usurpcompetitive advantages from their joint venture partners more than fums of othernationalities? Might certain types of joint ventures be more likely to provokesuspicion among participants than others? How much might cultural differencescontribute to the perception of cheating, and can these differences be overcome?To help answer these questions, a model will be developed to distinguish econom-ics-based (transaction cost-related) from culture-based explanations of joint ven-
ture failure. This model will be applied to analyse and synthesise the growingliterature in this area. In the literature on strategic alliances, the term "jointventure" is sometimes used to refer to a specific ownership structure, while atother times it is used more generally to mean any form of strategic partnershipwhich is neither completely arm's-length nor completely internalised. For thepurposes of this paper, the second, more general definition is used.
A TRANSACTION COST PERSPECTIVE OF JOINT VENTURE FAILURE
Intemalisation theory, as developed by Rugman(1981, 1985) lays out theconditions under which production and exchange are arranged within the interna-tional markets of a multinational enterprise. The main thrust of this theory is theanalysis of the transaction costs associated with each activity when penetrating aforeign market. The theory can easily be extended to explain the choice of jointventures as an entry mode to serve foreign markets.
The transaction cost rationale for choosing cooperative ventures over w holly-owned subsidiaries is described in Beamish's (1988) extension to Rugman's
(1981) intemalisation explanation of MNEs. Under certain conditions, transactioncosts associated with joint ventures will be lower than that of wholly-ownedsubsidiaries. Buckley and Casson (1988) developed a similar transaction cost-based theory of cooperation in international business. The conditions for suchventures to be successful relate to the absence of opportunistic behaviour (in thespirit of Williamson, 1985) by the coalition partners, and their ability to econo-mise on bounded rationality through the joint venture. In our view, joint venturesshould be preferred if the two partners possess firm specific advantages (FSAs)which complement each other.
The concept of FSA refers to a company's proprietary know-how in termsof unique skills that reduce costs or differentiate products. Only if the FSA s of thepartners are compatible will that cooperation lead to additional cost-reducing ordifferentiation- enhancing potential. In this instance, an international joint venture
makes economic sense, when compared to other entry modes. Contractor andLorange (1988, pp. 9-10) detail the strategic contributions that joint ventures canmake to increase revenues and decrease costs for their sponsors.
In addition, from a transaction cost perspective, the benefits of using thepartner's FSAs must be weighed against the costs associated with managing thejoint venture, and the risk of dissipation of the corporation's own FSAs.
Joint ventures will only succeed if efficient safeguards can be introducedagainst opportunistic behaviour. This is to prevent one partner from acquiring theFSA of the other partner and terminating the venture, or using the FSA at theexpenses of the initial owner. Hence, an efficient reward and control system mustbe introduced that correctly refiects the contribution of each firm in the venture.
Beamish (1988) demonstrates that there are limits to the relative efficiency gainsprovided by joint ventures. These gains are subject to the risk of dissipation ofproprietary knowledge if some of the partners engage in "cheating" behaviour.
On the basis of the analysis made above. Exhibit1 can be constructed. Thehorizontal axis measures the com patibility of the FSAs of the firms involved. Thiscompatibility can be weak or strong. An activity should be transferred to a jointventure only if it can be done m ore efficiently by the partners together, i.e., whensynergistic effects occur from complem entary FSA s. The vertical axis reflects thepossibility of introducing safeguards against opportunistic behaviour. They areeither inefficient or efficient. Such safeguards include structural arrangements toregulate the contribution and the flow of benefits to each firm participating in the
venture. In practice this may imply the rights of each partner to veto certaindecisions, a particular representation of each partner in the management structuregoverning the joint venture, and the use of specific planning procedures.
In quadrant 1, the FSAs of the partners are not compatible, i.e., they do notlead to synergistic effects. There are inefficient safeguards against ch eating. Each
partner could pursue its own interests at the expenses of the other. Failure tohonour the contracted obligations or any informal obligations may lead to the
failure of the joint venture. Respecting informal understand ings is as important forsuccess as abiding by formal undertakings (Williamson, 1985).
Quadrant 2 captures the case where sufficient safeguards could be intro-duced against cheating, but where no joint benefits could be generated because theFSAs of the firms involved do not complement each other.
The third quadrant identifies a bad governance structure as the main causeof joint venture failure. Here the venture will not succeed in spite of the strongcomp atibility of the FSAs of the different partners. The incentive to cheat arisesfrom participant's perceptions of the benefits available from cheating. Participantswill be motivated to cheat if they cannot punish each other through recourse tolegal channels or more direct methods, or if participants do not share in the
residual risks of the venture. Since the existence of benefits associated withcheating is the key to motivating opportunistic behaviour, firms with an estab-lished reputation for always carrying out reprisals in response to cheating, providetheir partners with the strongest incentives to abstain from opportunistic behav-iour. Thus, foregoing short-term gains in order to develop a reputation for recip-rocating forbearance is an investment that allows firms to save on future transac-
tion costs. In other words, some firms may de velop a special skill in the efficientmanagement of joint ventures. This FSA then reduces the need for extensivestructural safeguards. Limited bureaucratic control systems suffice to create anefficient safeguard against opportunism. In this particular case, the two axes ofExhibit 1 are interrelated. An FSA in the management of joint ventures increasesthe compatibility of the two partners and also limits the requirements for achiev-ing an efficient safeguard structure.
The relationship between FSA compatibility and efficient safeguards isdynamic. It is possible that a low initial level of mutual forbearance can betransformed into a high degree of trust, thus reducing the required structuralsafeguards to avoid cheating. The joint venture then moves to quadrant 4, wherea transaction cost framework would normally predict cooperative arrangements tobe successful.
Such a view of joint ventures is largely based upon Western concepts oflegal institutions and bureaucratic control to enforce internal relationships, al-though it does recognise the importance of trust. It may or may not explainJapanese thinking. The transaction cost framework presented here is already anadvance upon the type of framework used by Porter (1980). He stresses thecompetitive potential of all business relationships, and devises strategies forgaining the competitive advantage. By contrast, Buckley and Casson (1988)emphasise the gains from cooperation and the mechanisms for maintaining bal-anced power in order to reduce the incentives to qheat, thereby husbanding thepotential benefits of the cooperative relationship. The costs of cooperation arisefrom the risk of opportunistic behaviour in a context of vulnerability. In terms of
creating only a limited number of explicit safeguards, the greater the trust, themore vulnerability is acceptable.
In practice, joint ventures located in quadrant 4 may still fail because oftransaction costs resulting from uncertainty and bounded rationality. For example,one partner may not realise during the negotiations how much it will contribute tothe joint venture (and to the other partner), and thus may not demand adequatecompensation. One partner may not be aware of the potential value of its proprie-tary knowledge until the other partner has appropriated it. One partner may bemore skilled at learning and making use of the other partner's skills and resources.Control over various kinds of access may be lost.
Each of these scenarios involves the dissipation of an FSA without ade-
quate compensation. Due to the prevalence of transfers of intangible sources ofwealth, the potential for incorrectly estimating the costs and benefits of the jointventure is very high, in spite of efficient safeguards against chea ting. This consti-tutes a major problem if one participant believes the ratio of its contribution to hisreturns to be lower than the other participant's. If the costs and benefits are
Japanese Joint Ventures: Brown, Rugman and Verbeke
incorrectly estimated by one participant but not the other, the participant w ho feelsinadequately compensated may be motivated to dissolve the relationship or tocheat in spite of a safeguard structure which was agreed upon. Thus, the gainsfrom forbearance may never be realised due to the difficulty of generating suffi-cient knowledge to exercise informed decisions. In this case, the venture shiftsback to quadrant 3.
In our view, however, the bounded rationality problem as a cause of jointventure failure in quadrant 4 is only a secondary issue. In the next section w e shallargue that culture-related elements are the main cause of failure for joint venturesin quadrant 4 of Exhibit 1.
We shall now attempt to explain failed ventures between Japanese andWestern partners using Exhibit 1, leaving the culture issue aside, for the moment.
In the 1960s and 1970s, entry into the Japanese market via direct investmentbecam e necessary in order to compete w ith Japanese rivals in their protected ho memarket. Such investments enabled foreign firms to force their Japanese competi-tors to redirect more resources to maintaining market share in the home market.This defensive type of foreign investment was a strategic move, which wouldbenefit the company as a whole even if the Japanese branch was not a big money-maker (H ladik, 19 85, p. 28). How ever, because of entry barriers into the Japanesemarket, a Japanese partner became necessary. Western fums had a greater ten-dency to enter into joint ventures with Japanese partners, even when the risk ofdissipation of the company's FSAs was high. Thus, it was not at all surprising thatsuch joint ventures would result in complaints from the Western partner that itsFSAs had been usurped.
Any form of entry into a foreign market incurs the risk of dissipation ofreplicable FSAs (Rugman, 1981, 1985; Beamish, 1988). Joint ventures entail ahigh risk of dissipation of replicable FSAs because the partners need to exchangeinformation in order to make the partnership w ork. This risk is tolerable only if thereturns from the venture are sufficient to compensate for any advantage lostthrough the sharing of the FSA. If a firm's survival rests solely on a limited set ofeasily replicable FSAs, the risk of FSA dissipation through the venture is ex-tremely great. The returns are then highly unlikely to compensate for the eventualfailure of the company due to the loss of its competitive advantage. This wouldposition most failed ventures described above in quadrant 3 of Exhibit 1. Insuffi-cient resources were devoted to the creation of an efficient safeguard structure.
In addition, there are a class of failed joint v entures in quadrant 1. Here theWestern partner is less able to make use of the benefits provided by the Japanesepartner. This is particularly likelyin joint ventures between small, entrepreneurial,technology companies in the West, and large Japanese industrial concerns. Hull,Slowinski, Wharton and Azumi (1988) find that Japanese corporations are now
offering to reengineer, manufacture, and sell the product inventions of small U.S.high-tech firms in the Asian market. In exchange, the small high-tech firmsreceive money and process technology to help them manufacture for the U.S.market. This presents two potential problems.
First, the entrepreneurial firm is unlikely to have either the capital to set upits own m anufacturing facilities, or the know- how to make full use of the processengineering knowledge available from the Japanese corporation. Second, theJapanese firm is able to begin to export into the U.S. market the very productobtained from the technology entrepreneur. With an ability to use manufacturinglearning curve effects, the Japanese import can undercut the price of the domes-tically produced product, even though the domestic producer had access to theJapanese partner's process technology. In such cases, it is the simultaneousoccurrence of incompatible FSAs (from the perspective of the small firm) and the
inefficiency of the safeguard structure which leads to failure.
THE INCOMPATIBILITY OF SOCIETAL VALUES: THE SIMPLE VIEW
In contrast to the recent development of economics-based thinking aboutWestern-Japanese joint venture failure, the difference between Japanese andWestem cultures has become a popular catch-all explanation for such difficulties.Despite the number of books and articles which attempt to interpret Japaneseculture (and business practices) for foreigners, it appears that the implications ofthe differences cannot be fully appreciated without being experienced (Eason,1986).
What these cultural differences mean and how they should be handledcover a wide spectrum. At one extreme, Reich and Mankin (1986) and Wolf(1983) take the view that Japanese culture is simply not conducive to goodbusiness relations. They argue that, coordinated by the Ministry of InternationalTrade and Industry, Japanese firms use (by Westem standards) unethical practicessuch as cartels, collusion and dumping to dominate world trade. Joint venturesplace what remaining competitive advantages Westem firms have left at the readydisposal of power-hungry Japanese partners.
According to Wolf (1983) and de Mente (1968), the Japanese simultane-ously feel superior to other races and insecure about their future. Japan's lack ofnatural resources and usable land mass and its inability to impose its will militarily
during World War II seem to have had a deep psychological effect, and havecreated a feeling that security for the future will be found only through economicpower. Ohmae (1985) points out that, just as the West has fears about theeconomic intentions of Japan, the Japanese believe that German companies areintending to destroy the Japanese chemical industry through massive R & D
Japanese Joint Ventures: Brown, Rugman and Verbeke
investments and cost competitiveness, and that the Americans are corrupting the
Japanese with fast food.According to this simple view, the West fears Japan because it has gone so
quickly from disaster to economic dominance. Having been caught napping in theautomobile, semiconductor, and consumer electronics markets, Westem compa-nies have come to believe that the Japanese are a supremely clever, and possiblyevil, competitive force that cannot be overcome. Writings such as Wolf's (1983)and Reich and Mankin's (1986) are top simplistic although both authors base theircontentions on eviden ce, such as the Hitachi espionag e, and documented instancesof product copying.
At the other end of the spectrum are writers who claim that joint venturesbetween Japanese and Westem firms fail because Westem firms are too culture-bound, insensitive to the nuances of Japanese business practices, and entrenchedin their own bad management practices. In a study of Westem-Japanese jointventures within Japan, Pucik (1988, p. 488) states:
The reason for low performance could often be traced to the poor organizationalcapability of the Westem partner to manage and control the cooperative relation-ship. This deficiency demonstrated itself in a number of forms ranging fromignorance about or misreading ofthe strategic intentions of their Japanese partner,to disagreements about the implementation of daily business decisions. In particu-lar, the Westem firms observed did not pay sufficient attention to the competitiveaspects of the joint venture relationship and were not prepared for the possibility ofchanges in the relative power of their Japanese partners over time.
It can be argued that these reasons for failure can easily be given a trans-action cost based interpretation, related to incompatible FS As and inefficient safe-guards. The issue of culture is cmcial here. The first source of joint venture failureis not the absence of sufficient safeguards or weak comp atibility of FSAs , but theculturally-related inability of Westem firms to introduce an efficient gove ma ncestructure, and to reap the benefits of using the Japanese partners' FSAs.
Two interesting implications arise from Puc ik's analysis: One, the assump-tion that the Westem partner should have had control over the relationship, andtwo, that competitive behaviour was to be expected within the relationship whichthe Westem partner should have guarded against. Using the Buckley and Casson
(1988) framework, however, it could be argued that efficient safeguards do notimply that one partner has full control in a cooperative relationsh ip. If the venturesbegan with a perceived power asymmetry in favour of the Westem partner, itseems likely that the Westem partner, perhaps inadvertently, behaved in a waythat was viewed as cheating by the Japanese partner. Given the Japanese tendencytoward circumlocution and avoidance of unpleasantness in communications
(Wright, 1979; De Mente, 1968, 1972;Wolf, 1983), the Western p artner might notbecome aware of the Japanese partner's dissatisfaction. Since cheating by onepartner reduces or remov es the incentive for the other partner to refrain fromcheating, it is expected that the Japanese partner would cheat once power shiftedin its favour. In any case, the main reason for joint venture failure is the lowcompatibility of societal values, rather than the absence of efficient structuralsafeguards or a low compatibility of FSAs.
Falling between the two extremes are writers who take the position thatproblems arising from cultural differences are very great, but can be overcome bygood managem ent on both sides. De Mente (1968 , 1972) finds aspects of Japaneseculture which simply cannot be reconciled with American management practice.De Mente characterises American management practice as revolving around acode of ethics, while Japanese management is dominated by a code of manners.The ideal of American business is outstanding achievement without resorting todeception or foul play. In Japan, the ideals are form, etiquette and "face"- valueswhich have become deeply ingrained due to centuries of attention to such matters.
While American employees strive for outstanding personal achievement,Japanese employees are concerned with collective achievement, fitting in, andbeing inconspicuous. While, to an American "sincerity" means lack of pretense ordeceit, to a Japanese it means not doing anything that would cause anyone to loseface. Basic values such as truth, honesty and fairness mean entirely differentthings to the Japanese than they do to Westerners.
There are numerous other differences between Japanese and Western firms
that make joint ventures difficult. Again, due to diverging societal values, Japa-nese firms emphasise long-term growth over short-term profit, while Westernfirms must give equal if not greater attention to short-term results (Wright, 1979).These opposing views are fostered by the differences in financial markets andlegal environments between Japan and many Western nations. Individuals areexpected to subordinate themselves to the group to a far greater degree in Japan,and as a result, team loyalty and consensus is much greater and more highlyvalued (Lorsch, 1987). In spite of the length of time that W estern firms ha ve beenconducting business in Japan, and the number of books and articles that stress theprofound differences between Japanese and Western cultures, and interpret Japa-nese culture for Westerners, it appears that Western firms still do not spendadequate time in learning about Japan and Japanese business practice before
making a decision on the best way to move into the Japanese market (Eason,1986).
Japanese Joint Ventures: Brown, Rugman and Verbeke
THE INCOMPATIBILITY OF SOCIETAL VALUES:MORE COMPLEX VIEWS
The possibility exists that the emphasis on cultural differences reviewed sofar is exaggerated and even misplaced. Problems of understanding and adapting tolocal culture always exist whenever a firm moves into a market in a nation whereit has not done business before. Since U.S. companies that form internationalcoalitions tend to be larger and more experienced than U.S. companies that do not(Ghemawat, Porter and Rawlinson, 1986), many of the companies that form jointventures with Japanese firms have had experiences in international ventures. Itcan therefore be assumed that they have at least some awareness of the problemsof managing transnational relationships. Thus, for culture to be a major factorbehind the problems between p artners in Japanese-Western joint venture s, the dif-ferences between Japanese and Western cultures would have to be greater than thedifferences among Western cultures.
There is some evidence to support this contention. Hofstede (1980) hasfound major differences in four different dimensions of culture among e mp loyeesof one firm at branches in forty countries. The dimensions used were powerdistance, uncertainty avoidance, individualism, and masculinity. When the scoresof English-speaking countries such as Canada, the United States, and GreatBritain are compared with Japan's, it was seen that the average scores on each ofthe four indices for the English-speaking countries are clustered, with none of thedifferences between the scores being statistically significant. In contrast, thedifference in the scores between Japan and these English-speaking countries arestatistically significant for all but the power distance index. In fact, for themasculinity index, Japan had the highest score, while the English-speaking co untriesdid not differ significantly from the mean. C onversely, oh the individuality index ,the United States had the highest score w hile Japan did not differ significantlyfrom the mean.
The implication that can be drawn from Hofstede's analysis is that withregard to these four dimensions of culture relevant for business practice, Japan issignificantly different from Western countries, with the difference between Japanand the United States being the most. Although Western nations differ amongthemselves, the differences are, for the most part, not as great as the differencesbetween these countries and Japan. On these grounds, joint ventures with Japa-nese firms will generally be more difficult to manage than international jointventures between Western nations.
In contrast, McMillan (1984) takes the view that the key to the greatsuccess of the Japanese has simply been good management practice, and thatmany of their practices are applicable in any country. This view seems to have
some merit. If McMillan is correct, one reason for the recent upsurge in jointventures between Japanese and American firms within the United States may bethat American firms are finally attempting to find out what Japanese practices canbe used to their advantage. They may also be aimed at learning how to work withJapanese partners so that they can jointly participate in ventures elsewhere in theworld.
The work by Westney (1988) supports McMillan's view. She argues thatU.S. firms often suffer from the "not-invented-here" syndrome. This syndromeimplies that insufficient resources are allocated to scan the environment forinnovations and actively adapt them. In contrast, Japanese firms consider env iron-mental scanning and reverse engineering as important functions, and are more aptto commercialise available technology despite making relatively few major dis-coveries. In addition, the Japanese realised early in the 20th century that they hadfallen behind the rest of the world in economic and technological progress, andbecame kee nly aw are of the need to catch up. Thus, adopting outside m ethods andtechnology and adapting them to fit the new environment has greater historicallegitimacy in Japan than elsewhere.
The implication for joint ventures is that many Japanese firms have devel-oped a culturally determined FSA in well-honed learning skills and the willing-ness to absorb useful ideas from foreign venture partners. Westney (1988) fmdsthat one of the factors that has facilitated Japanese m anagement of cooperative re-lationships is the practice of sending employees on temporary assignments outsidethe firm as part of their career development. Although this is done in someWestern m ultinationals as well, most managers are reluctant to be away from headoffice for too long because of the risk of being forgotten. This routine movementof employees among Japanese firms trains key personnel to cope with newsituations, such as joint ventures, and absorb whatever information they can. Thisgives the Japanese a seemingly unfair advantage in joint ventures with Westernpartners; the Western partner may not be aware of how much information it ismaking available to the Japanese partner, and may be shocked at some point todiscover that much more of its proprietary knowledge has been transferred to thepartner than had been foreseen.
Given the cost of creating proprietary knowledge, and its intangible nature,unexpected transfers of knowledge may cause the disadvantaged partner to accusethe other partner of cheating. Alternatively, Western firms, having a more adver-
sarial view of strategic alliances, could view the Japanese partner's superiorability to make use of the experience and knowledge gained in the joint venture ascheating.
Japanese Joint Ventures: Brown, Rugman an d Verbeke
THE INCOMPATIBILITY OF CORPORATE CULTURES
In the previous section, we argued that significant cultural differencesbetween Japan and Western countries create conflict in business arrangements ofall kinds between their firms. However, by viewing culture in a unitary fashion,some important distinctions were overlooked. In reality, culture related problemsthat occur in many joint ventures consist of two elements: incompatibility ofambient cultures (the culture of the nation as a whole) and, incompatibility oforganisational cultures.
Joint venture problems arising from a weak compatibility in organisationalculture can be attributed to differences in ambient cultures. The distinction be-tween the two is important because organisational cultures are more open andresponsive to intentional change than are ambient cultures. Another important
consideration that arises from distinguishing between ambient and organisationalcultures is that all Japanese firms are not alike, any more than all Western firmsare, and that choosing the right joint venture partner is an important issue. Forexample, Harrigan (1988, p. 67) claims that General Motors' values are moresimilar to those of its venture partner, Toyota, than to Ford's values. Such strongcompatibility of organisational culture make it easier for issues of strategy to beworked out. Here, it should be recognised that a successful joint venture does notnecessarily require similar values. In fact, value-differences used in a collabora-tive fashion may lead to culture based synergies.
It is not surprising that problems arise when joint ventures were created togain access to the Japanese market. W estern firms neglected to spend sufficientresources to fully investigate a number of joint venture partners before choosingone. Since Japanese negotiators are often not forthright or candid. Western man-agers have trouble reading the signals. Hence, the probability that a number oforganisational mismatches result is high. More recently, the fear and awe of theJapanese miracle have become factors that motivate Western firms to enter intojoint ventures. In taking this action, they hope to co-opt an actual or potentialcompetitor and reduce the threat posed by the Japanese; This led to a number ofhastily-formed joint venture arrangements between incompatible partners in termsof corporate culture.
A study by Harrigan (1988) examined how differences between sponsoringfirms (that is,the joint ven ture partners) might affect the efficiency of the strategicalliance. The majority (57.2 percent) of the joint ventures in the study were
between pairs of U.S. firms, but the next-largest category of partner pairs wasJapanese-U.S., which accounted for 14.4 percent of the sample. Harrigan foundthat 58.9 percent of ventures between the pairs ofU.S. partners were judged to beunsuccessful by one or both companies. This result demonstrates that venturesbetween Japanese and Western firms are not always more problematic than thosebetween two Western firms.
Dissatisfaction on the part of one or both joint venture partners is a com-mon phenomenon; in our view it is current Western thinking about Japan thatmakes Japanese-Western joint ventures stand out from the rest.
. Harrigan found that Japanese sponsors occurred most frequently in indus-tries like automobiles, communications equipment, computer and peripheralequipment, metals fabrication, Pharmaceuticals, precision controls and robotics,steel, and videotape recorders and videodisc players. Automobiles, metals fabri-cation and Pharmaceuticals had higher than 50 percent success rates. In automo-biles, none of the ventures were between two U.S. firms, suggesting that, in thisindustry at least, homogenous societal values are certainly not a critical factor inthe creation of joint ventures. In communications equipment, computers and pe-ripherals, metal fabrication and pharmaceuticals, the ventures were less likely tobe successful if both sponsors were U.S. firms than when one or both sponsors
were not. This finding is particularly striking as metal fabrication and pharma ceu-ticals were two of the industries that had the greatest relative levels of success.Clearly, transnational ventures are not more prone to failure in all industries. Italso appears from this empirical research that the compatibility of organisationalcultures is more important than similarity of national origin.
LINKING ECONOMIC AND CULTURAL EXPLANATIONS FORJOINT VENTURE FAILURE
The recent upswing in joint ventures between Japanese and Western firmsprobably stems from the desire to co-opt what each side sees as a threatening
force. This hypothe sis is consistent with the findings of Hergert and Mo rris (1988)and Harrigan (1988). They show that most joint ventures formed since 1975 arebetween competitors or potential competitors, rather than vertically-linked firms.The problem engendered by using a joint venture to co-opt a competitor is that,while the joint venture lessens competition in some or all niarkets, it opens eachside to risks of dissipation of proprietary knowledge.
Several of the cultural practices discussed previously suggest that, particu-larly in Japanese-Western joint ventures, each side will overestimate the likeli-hood of cheating by the other parmer in the near future, thus reducing the expectedstream of benefits from cooperation. For example, Japanese managers believecontracts are an indication of distrust (Eason, 1986). Westerners, in contrast, feelthat the unwillingness to sign and abide by contracts is an indication of dishonou r-able intent. The Japanese believe the straightforwardness of Westerners is rudeand probably masks deceit. Westerners believe the Japanese inability to come tothe point quickly denotes trickery, and find their negotiating tactics underhanded.In short, each side places a moral value on certain kinds of behaviour, and sees theother side's behaviour as immoral. The ill-feeling this engenders undoubtedly
Japanese Joint Ventures: Brown, Rugman and Verbeke
predisposes members of both sides of the agreement to interpret the problems thatwould occur even between joint ventures of partners of the same nationality, asintentional deception.
Buckley and Casson (1988) point out that the discontinuation of forbear-ance by one partner in an agreement seriously impairs the other partn er's incentiveto continue to forbear. This means that culture related misunderstandings that leadto false attributions of cheating will lead to genuine attempts to cheat. They havealso argued that an inefficient safeguard structure, in terms of not eliminatingexcessive power imbalances between the partners incite the weaker partner tocheat out of fear of the stronger partner doing so first. Because the weaker partneris less able to punish the stronger partner, the weaker partner assumes that thestronger partner will use its superior power to unfair advantage, simply because it
can do so with impunity.
In the context of Japan-Western joint ventures each firm often perceivesitself as the weak partner due to dealing so closely with a powerful competitorwhose nature is not fully understood. The likelihood of cheating increases dra-matically. H ence, differences in ambient cultures, and organisational cultures maylead to a web of fear and mistrust that increase both actual cheating and percep-tions of cheating in joint ventures between Japanese and Western firms.
The opportunisitic behaviour, discussed in the transaction cost perspectiveof joint venture failure, triggered by culturally determined expectations of thepartner's behaviour implies that economics and culture based explanations of joint
venture failure cannot be unbundled in practice and should be investigated simul-taneously. This conclusion is also in accordance with the observation made earlierthat many Japanese firms have a culturally determined FSA in absorbing knowl-edge through joint ventures. It is paradoxical that such an FSA diminishes theoverall compatibility of the FSAs of the partners and requires a more elaboratesafeguard structure to regulate the flow of benefits accruing to each of them.
A MATRIX OF ECONOMIC AND CULTURAL DIFFERENCES
In order to classify the existing literature, the matrix in Exhibit 2 com binescultural and economic (transaction cost related) reasons for joint venture failure.On the vertical axis, weak economic compatibility is identified as a possiblereason for failure. This may occur even if the firms have FSAs that complementeach other. For example, some degree of failure is anticipated when firms arepositioned in quadrant 3 of Exhibit 1, where an inefficient governance structurehas been introduced to implement the joint venture.
The horizontal axis treats cultural incompatibility in a similar fashion.When there are strong perceptions of cultural incompatibility, there is a highprobability that the joint venture will fail. Exhibit 2 also allows us to analyse thesimultaneous impact of economic and cultural elements on the viability of jointventures. In quadrant 1, there is a strong possibility that the joint venture willsucceed since there is strong economic and cultural compatibility.
The more subtle quadrants are the intermediate cases. In quadrant 2, thereis a strong cultural compatibility but a Weak economic one. This implies thattransaction cost related reasons for possible joint venture failure, need to beunderstood by the joint venture partners in order for it to succeed. There is everyreason to believe that Japanese and Western firms can analyse issues such asopportunism and work toward s the success of joint ventures in quadrant 2 throughthe implementation of efficient safeguards, thus shifting the venture to quadrant 1.
However, in quadrant 3, weak cultural compatibility combined with strongeconomic co mpatiability will probably lead to the failure of such a joint ven ture,
because of the impact of culturally determined perceptions on actual opportunisticbehaviour. It is much more difficult for the partners to recognise the nature andeffect of cultural differences than it is to recognise problems solely related toeconomic compatibility. The perception of cultural incompatibility is clouded bysubjectivity on the part of the participants, whereas problems of economic com-
Japanese Joint Ventures: Brown, Rugman and Verbeke
patibility can be analysed more objectively. Therefore, it is predicted that quad-
rant 3 joint ventures will probably fail whereas quadrant 2 ones may still be suc-cessful.
The literature reviewed in this paper can now be summarised using thismatrix. The article num bers from the reference list are used to indicate the primaryfocus of the key argument (implicit or explicit) in each contribution made toexplain joint venture failure. For example, the writers stressing transaction costreasons for failure, such as Buckley and Casson and Harrigan, are positioned inquadrant 2. Writers emphasising cultural differences as sufficient reasons forfailure, such as de Mente, Pucik, and Wright, are in quadrant 3. Finally, writersemphasising both economic and cultural factors, such as Hamel, Doz and Pra-halad, McMillan, and Westney, are in quadrant 4.
As mentioned earlier, it may be extremely difficult in practice to unbundleeconomic and cultural reasons for failure, but this should not prevent researchersfrom attempting to identify the prime source of failure (locating the venture inquadrant 2 or 3) and recognising that the interaction between economic andcultural elements may lead the venture to shift to quadrant 4.
MAKING JOINT VENTURES SUCCEED
Hamel, Doz and Prahalad (1986) suggest that the problem of cheating byJapanese joint venture partners should be dealt with by limiting ventures to short-term arrangements. Several of the factors discussed in this paper suggest that thissolution will not work. First, Japanese manager appear to be more comfortablewith long-term relationship. Short-term arrangements therefore may arouse nega-tive feelings. Second, a short-term arrangement is apt to have low status within theJapanese parent, which means that the best personnel will not be sent to operateit (Puchik, 1988). Third, a short-term arrangement usually carries with it a smallerstream of potential benefits than a long-term arrangement. This being so, neitherside will be as motivated to forbear because the immediate benefits from cheatingmay match or exceed the expected benefits of cooperation. For this reason, short-term arrangements are far more likely to evoke competition than cooperation.
In order for joint ventures between Japanese and Western firms to succeed,it will be necessary to improve ma nage men t's information about their partners.
This requires mutual understanding of each other's economic and cultural phi-losophies and practices, (Adler and Doktor, 1986). Acquiring such knowledge, letalone understanding it well enough to embed it into the organisational structuresof the two sets of multinational enterprises, will be a major challenge. One steptowards success would be to advance management perceptions beyond a recogni-
tion of simplistic country-specific factors towards a more detailed understanding
of the precise nature of each other's corporate culture.
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