International Joint-Ventures Individual Report

MINISTRY OF EDUCATION AND TRAINING
NATIONAL ECONOMICS UNIVERSITY

…………..o0o…………..
INTERNATIONAL JOINT VENTURE
INDIVIDUAL ASSIGNMENT
ANNOTATED BIBLIOGRAPHY
Student Nguyen Thanh Thuy
Student ID 11215646
Lecturer Assoc. Prof. Bui Huy Nhuong
Class: International Business Management 63A

School of Advanced Programs (AEP)
A. Introduction
I chose this article to investigate the financial impact of international joint ventures
(IJVs) in emerging markets on shareholder wealth. The topic intrigued me due to the
potential for IJVs to both create value and introduce complexities. The research explores
how theoretical perspectives like transaction costs and strategic behavior influence IJV
formation decisions. Additionally, the analysis of factors like venture complexity and
political risk piqued my interest, as they likely influence investor sentiment towards
these ventures. By understanding these financial implications, I hope to gain valuable
insights into the strategic considerations for firms contemplating IJVs in emerging
markets.
In the research article called “International joint ventures, shareholder returns,
venture complexity, and political risk” by John J. Wild, Jonathan M. Wild and Kenneth
L. Wild, the study examines how creating international joint ventures in emerging
markets affects shareholder value. The study shows that these ventures tend to be
beneficial for shareholders, increasing firm value by over 1% on average. It also looks
at two key factors that influence how the market perceives these ventures: their
complexity and the political instability of the host country. The findings show that
simpler ventures in emerging markets lead to greater gains for shareholders compared
to more complex ones. Additionally, shareholders are shown to expect a higher return
for taking on greater political risk. This research not only helps us understand the
consequences of forming international joint ventures, but also provides valuable
insights for managers choosing locations for such ventures, taking into account venture
complexity and the political risk of emerging markets.
B. Research Objective
A substantial body of research explores the value creation potential of international
joint ventures (IJVs), particularly within emerging markets. This essay investigates the
financial implications of IJV formation for shareholder wealth. The researchers posit
that IJVs contribute positively to shareholder value through various mechanisms. The
article introduce two key factors influencing the market's assessment of IJVs:
complexity and political risk. They hypothesize that less complex ventures (marketing
only) are more favorably received by investors compared to more complex ventures
(manufacturing and marketing). Furthermore, the researchers posit a positive
correlation between political risk and shareholder returns, suggesting investors expect
a risk premium for entering ventures in politically unstable environments.
C. Literature review and hypothesis

1. Theory of Joint venture formation
Firms form joint ventures for various reasons. Transaction cost theory focuses on
minimizing costs through this structure. Strategic behavior theory sees ventures as a
way to gain an edge on competitors. Organizational learning theory highlights the
importance of sharing knowledge that's hard to transfer otherwise. These theories are
interconnected and can all explain why firms choose joint ventures.
2. Valuation of international joint-ventures
In theory, a company's value is based on its future cash flow. Joint ventures involve
investing in new projects with risks. Studies on domestic ventures generally show
positive effects on company value. Studies on international ventures have mixed results.
This research focuses on joint ventures in emerging markets and how they impact
shareholders.
H1: Shareholders' financial well-being is impacted by forming international joint
ventures in emerging markets.
H2: International joint ventures in emerging markets lead to an increase in
shareholder wealth.
3. Joint venture complexity and shareholder value
Simpler ventures, focused on one activity like marketing, are predicted to be more
valuable than complex ventures with multiple activities like manufacturing. Complex
ventures require more resources and have a higher risk of failure. This study uses the
number of functions a venture performs as a measure of complexity. The third
hypothesis predicts that shareholders will find simpler, single-function ventures more
valuable than complex, multi-function ones.
H3: Shareholders see a greater financial gain from forming international joint
ventures in emerging markets that focus on a single task compared to those juggling
multiple tasks.
4. Host country political risk
Political instability can affect a company's operations, products, and overall decision-
making. Studies generally show a negative connection between political risk and
foreign investment. However, there's some disagreement on whether companies get a
higher return (risk premium) for investing in riskier markets. This research looks at
whether joint ventures in politically unstable emerging markets offer shareholders a risk
premium to compensate for the additional uncertainty.
H4: Shareholders earn a greater financial return from entering into international joint
ventures in emerging markets with higher political risk compared to those in lower-risk
markets.
D. Sample Selection and Methodolody

The study gathered information on 75 international joint ventures in emerging
markets. Researchers used LexisNexis, a database with press releases and news articles,
to identify these ventures. To be included, ventures had to meet specific criteria. First,
they had to fit the definition of an international joint venture. Second, the parent
company's stock return data needed to be available in another database (CRSP). Third,
the venture's activities had to be confined to a single emerging market country (both
manufacturing and marketing, for example, couldn't occur in separate countries) (Meyer
et al. (2019). Finally, the chosen emerging market offered a variety of economic and
political conditions for analysis. These criteria ensured a focused and relevant sample
for studying the financial impact of joint ventures.
E. Empirical result
The study confirms that forming international joint ventures (IJVs) in emerging
markets creates significant value for shareholders. Shareholder returns experience a
positive jump upon IJV formation, with an average increase exceeding 1%. This
positive impact is likely amplified by the focus on emerging markets, which offer
unique opportunities.
Further analysis reveals a clear preference for simpler IJVs. Ventures solely focused
on marketing in emerging markets lead to a substantial shareholder return of 2.69%.
Conversely, IJVs undertaking both manufacturing and marketing within the emerging
market show negative returns of -0.25%. This suggests investors favor less complex
ventures, potentially due to lower risks and faster implementation.
Political risk also plays a role. Shareholders are rewarded for taking on greater
political risk. Firms entering high-risk markets see a return of 1.96% at formation,
compared to a mere 0.05% for those entering low-risk markets. Interestingly, even
within the low-risk category, a weak positive correlation between political risk and
shareholder returns exists. This suggests that even a slight increase in political risk
might be viewed favorably by investors in these already stable markets.
The study also provides compelling evidence that IJVs in emerging markets benefit
shareholders. However, venture complexity and political risk play a role in shaping
these benefits. Investors seem to favor simpler ventures and are willing to accept higher
returns for ventures operating in politically unstable environments.
This study sheds light on how international joint ventures (IJVs) in emerging markets
impact shareholder wealth. It explores the influence of both the venture itself
(complexity) and the host country's political environment (risk) on shareholder returns
at the venture's formation.
The research paves the way for further exploration. Future studies could delve deeper
into both the JV's characteristics and its surrounding environment. Additionally, the
market methodology used here could be applied to investigate other aspects of IJV
formation.
Beyond IJVs, the study encourages examining other forms of foreign direct
investment. Prior research on political changes and investment flows often overlooks
the diverse types and purposes of such investments. This methodology offers a way to
isolate the immediate shareholder reaction to an investment announcement, allowing
researchers to pinpoint the influence of political risk and other factors. Examining
various investment types could further elucidate the role of complexity, political risk,
and other considerations in foreign investment decisions.
F. Conclusion
This study investigated the financial implications of international joint venture (IJV)
formation in emerging markets for shareholder wealth. Empirical evidence confirms a
value-enhancing effect, with IJV formation leading to an average increase in firm value
exceeding 1%. The research further explored the influence of two key factors on market
assessment of IJVs: venture complexity and host country political risk.
Findings reveal a significant preference for less complex ventures. IJVs focused
solely on marketing within emerging markets generated a substantially positive impact
on shareholder wealth. Conversely, those undertaking both manufacturing and
marketing activities within the emerging market exhibited negative returns. This
suggests a market preference for less intricate ventures, potentially due to lower risks
and faster implementation timelines.
Political risk also emerged as a relevant factor. Shareholders are demonstrably
compensated for assuming greater political risk. Firms entering high-risk markets
experienced positive returns at formation, compared to those entering low-risk markets.
Interestingly, even within the low-risk category, a weak positive correlation between
political risk and shareholder returns was observed. This suggests that even a slight
increase in political risk might be viewed favorably by investors in these already stable
markets.
In conclusion, this study provides compelling evidence that IJVs in emerging
markets offer significant financial benefits to shareholders. However, venture
complexity and political risk play a role in shaping these benefits. Investors seem to
favor simpler ventures and are willing to accept higher returns for ventures operating in
politically unstable environments. These findings not only contribute to a deeper
understanding of IJV formation's financial implications but also offer valuable insights
for managers making location decisions for IJVs in emerging markets. By carefully
considering both venture complexity and political risk of the host country, managers
can make more informed strategic choices that maximize shareholder value.
Reference list
Carvalho, A. and Guimaraes, B. (2018). State-controlled companies and political risk:

Evidence from the 2014 Brazilian election. Journal of Public Economics, 159, pp.66–78.
doi:https://doi.org/10.1016/j.jpubeco.2018.02.002.
El Ghoul, S., Guedhami, O., Mansi, S.A. and Sy, O. (2022). Event studies in international
finance research. Journal of International Business Studies.
doi:https://doi.org/10.1057/s41267-022-00534-6.
Emsley, D. and Kidon, F. (2007). The Relationship between Trust and Control in International
Joint Ventures: Evidence from the Airline Industry. Contemporary Accounting Research,
24(3), pp.829–858. doi:https://doi.org/10.1506/car.24.3.7.
Goodman, R.M., Speers, M.A., Mcleroy, K., Fawcett, S., Kegler, M., Parker, E., Smith, S.R.,
Sterling, T.D. and Wallerstein, N. (1998). Identifying and Defining the Dimensions of
Community Capacity to Provide a Basis for Measurement. Health Education & Behavior,
25(3), pp.258–278. doi:https://doi.org/10.1177/109019819802500303.
Meyer, K.E., Estrin, S., Bhaumik, S.K. and Peng, M.W. (2019). Institutions, resources, and
entry strategies in emerging economies. Strategic Management Journal, 30(1), pp.61–80.
doi:https://doi.org/10.1002/smj.720.

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MINISTRY OF EDUCATION AND TRAINING

NATIONAL ECONOMICS UNIVERSITY

INTERNATIONAL JOINT VENTURE

Student Nguyen Thanh Thuy

Lecturer Assoc. Prof. Bui Huy Nhuong

Class: International Business Management 63A

C. Literature review and hypothesis

4. Host country political risk

D. Sample Selection and Methodolody

Carvalho, A. and Guimaraes, B. (2018). State-controlled companies and political risk:

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