Institutional differences and arbitration mechanisms in international joint ventures

Abstract

Research summary We theoretically and empirically study the effects of legal institutions on the inclusion of arbitration provisions in international joint venture (IJV) contracts. Legal institutions offer a public trilateral forum to handle interpartner disputes. However, these institutions function differently across countries, which can impede IJV partners from resolving disputes effectively through court systems. Alternatively, partners can take advantage of private trilateral resolution mechanisms in the form of arbitration. We argue and demonstrate that differences among partners' home country legal institutions regarding the legal traditions, as well as the importance of procedures and costs imposed in these countries for enforcing contracts, increase the likelihood of choosing arbitration over litigation. We also compare results for partners' recourse to IJV boards as a private, bilateral means of addressing conflicts. Managerial summary IJVs are powerful levers for market expansion and access to resources and capabilities. The risks of corrosive disputes caused by conflicting interests or misunderstandings among partners are nonetheless far from being negligible. Our study helps decision makers and managers increase their understanding of the options and remedies available for resolving disputes. We consider three mechanisms in particular: public courts, arbitration, and the board of directors. Findings show that considering the partners' home country legal environments but also the discrepancies between these environments is essential when it comes to giving preference to arbitration over public courts. Findings also suggest that decisions related to internal private ordering (i.e., relying on the JV board of directors) are driven by the exchange characteristics more than by institutional considerations.

Beyond the nation-state: Anchoring supranational institutions in international business research

“…On the most formal side of supranational institutions, IB research has historically focused on formal agreements between countries. IB scholars have shown, for example, that formal supranational institutions like investment protection agreements (Jandhyala & Weiner, 2014 ), bilateral trade agreements (Jandhyala, Henisz, & Mansfield, 2011 ), and intellectual property protection agreements (Brandl, Darendeli, & Mudambi, 2019 ), along with international arbitration proceedings (Devarakonda, Klijn, Reuer, & Duplat, 2021 ; Pinkham & Peng, 2017 ), can fill institutional voids in host countries and mitigate political risk, because supranational institutions constrain national institutional players (e.g., the host-country government). Political science and economics share an interest in international agreements like bilateral investment treaties, preferential trade agreements, and double-taxation agreements (Barthel & Neumayer, 2012 ; Büthe & Milner, 2008 ; Tobin & Rose-Ackerman, 2011 ), but emphasize more the limits to legalization and enforcement of these treaties and agreements through third parties (e.g., Abebe & Ginsburg, 2019 ) instead of the benefits of these treaties for MNCs in facilitating trade and investment across national borders.…”

“…Fifth, supranational institutions require consent of agents with sufficient power for enforcement because supranational institutions lack national sovereignty. Consensual enforcement can occur on the highest level of aggregation with two national institutional players (e.g., governments) agreeing on a nationally ratified and enforced supranational institution (e.g., a bilateral investment treaty) that subsequently affects MNCs in their transactions (Devarakonda et al, 2021 ; Moore et al, 2021 ; Pinkham & Peng, 2017 ). In supranational informal institutions, consensus can occur between a sufficiently large number of players or even between individuals (often across many countries) capable of exerting pressure on MNCs (e.g., civil society, international activism).…”

Antecedents of international joint ventures’ past, present and future: a meta-analytical review

“…Administrative distance is extracted from institutional theory which is of paramount interest to IJVs, as the institutional environment is considered to be the focal factors that determine the firm structure and firm behavior (Luo, 2001). The regulatory distance consists of legal, regulations and government policies (Devarakonda et al, 2019). Despite these problems with administrative distance, scholars have pointed out many benefits, for example, IJVs have access to complementary resources (Gubbi et al, 2010), facilitate penetration into untapped markets (Golgeci and Arslan, 2014), reduce the risk (Paltrinieri et al, 2020) and bridge the structural holes across the nationally bounded interfirm networks (Etemad et al, 2001).…”

Joint (Ad)ventures—Family firms' international entry mode choices for emerging markets

“…These factors are frequently found to be correlated to the formation of an IJV as they reduce the unfamiliarity and uncertainty associated with such markets (Hillemann et al, 2019;Makino and Neupert, 2000). IJVs have gained importance in the past decades due to the fast moving globalization and the necessity to form strategic alliances abroad to access international markets and knowledge (Devarakonda et al, 2020;Pothukuchi et al, 2002;Roy and Oliver, 2009). Especially the pace at which emerging economies -defined as 'low-income, rapid-growth countries using economic liberalization as their primary engine of growth' (Hoskisson et al, 2000) -are growing, the differences in the institutional environment (Holtbrügge and Baron, 2013), and the rapidly changing market conditions (Khanna et al, 2005), which often lead to high levels of uncertainty for the foreign players, contributed to the increasing popularity of IJVs as an entry mode for first market entries (Devarakonda et al, 2020;Shi et al, 2014).…”

“…IJVs have gained importance in the past decades due to the fast moving globalization and the necessity to form strategic alliances abroad to access international markets and knowledge (Devarakonda et al, 2020;Pothukuchi et al, 2002;Roy and Oliver, 2009). Especially the pace at which emerging economies -defined as 'low-income, rapid-growth countries using economic liberalization as their primary engine of growth' (Hoskisson et al, 2000) -are growing, the differences in the institutional environment (Holtbrügge and Baron, 2013), and the rapidly changing market conditions (Khanna et al, 2005), which often lead to high levels of uncertainty for the foreign players, contributed to the increasing popularity of IJVs as an entry mode for first market entries (Devarakonda et al, 2020;Shi et al, 2014). Having a local IJV partner decreases uncertainty as, on the one hand, the risk is shared, and on the other hand, information asymmetries are reduced and local behavior patterns are better understood (Beamish, 2013).…”