KNOWLEDE ASSETS AND DECISION RIGHTS IN JOINT VENTURES: A PROPERTY RIGHTS VIEW Evidence from Hungarian Joint Ventures Josef Windsperger Associate Professor of Organization and Management Center for Business Studies, University of Vienna, Brünner Str. 72, Austria Phone: +431427738180; Fax: +431427738174; Email: [email protected]Eva Kocsis Associate Professor of Economics Department of Economics, Corvinus University of Budapest Fővám tér 8 H-1093 Budapest, Hungary Phone: +36 1 482-5308; Fax; +361 482-5137 Email: [email protected]Miklos Rosta PhD candidate, Department of Economics, Corvinus University of Budapest Fővám tér 8 H-1093 Budapest, Hungary Phone: +36 1 482-5308; Fax; +361 482-5137 Email: [email protected]Abstract.The paper examines the role of joint venture partners’ knowledge assets as determinant of the decision structure in joint ventures (JV). According to the property rights approach, the structure of residual decision rights depends on the distribution of intangible knowledge assets that generate the JV-firm’s residual surplus. Intangible knowledge assets refer to the knowledge and skills (know-how) that cannot be easily codified and transferred through contracts (e.g. through licensing), since they have an important tacit component. Our analysis derives the following hypothesis: The more important the JV-partner's knowledge assets for the generation of residual surplus, the more residual decision rights are assigned to him. In addition, we examine two views on the relationship between residual decision and residual income rights in joint ventures: (a) Under the substitutability view, residual decision and residual income rights may be negatively related
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KNOWLEDE ASSETS AND DECISION RIGHTS IN JOINT
VENTURES: A PROPERTY RIGHTS VIEW
Evidence from Hungarian Joint Ventures
Josef WindspergerAssociate Professor of Organization and Management
Center for Business Studies, University of Vienna, Brünner Str. 72, AustriaPhone: +431427738180; Fax: +431427738174;
Abstract.The paper examines the role of joint venture partners’ knowledge assets as determinant of the decision structure in joint ventures (JV). According to the property rights approach, the structure of residual decision rights depends on the distribution of intangible knowledge assets that generate the JV-firm’s residual surplus. Intangible knowledge assets refer to the knowledge and skills (know-how) that cannot be easily codified and transferred through contracts (e.g. through licensing), since they have an important tacit component. Our analysis derives the following hypothesis: The more important the JV-partner's knowledge assets for the generation of residual surplus, the more residual decision rights are assigned to him. In addition, we examine two views on the relationship between residual decision and residual income rights in joint ventures: (a) Under the substitutability view, residual decision and residual income rights may be negatively related because a certain level of control may result either from the allocation of ownership (residual income) rights or the transfer of residual decision rights to the joint venture partners. (b) Under the complementarity view, residual decision and residual income rights are complements. This means that the JV-partner’s motivation to use his intangible assets to generate residual income is increased if the residual income rights are collocated with the residual decision rights. These property rights hypotheses are tested in the Hungarian market.
JV-partner 1's proportionof ownershipKnow how in productionand logisticsKnow how in humanresource managementLocal services know howKnow how in strategicplanningKnow how in controllingR&D-know howKnow how inorganization designKnow how in strategyformationLocal market knowledgeKnowledge of localinstitutions
N Minimum Maximum MeanStandarddeviation
Table 2: Decision Rights in Joint Ventures
79 1,00 7,00 3,0886 2,19083
79 1,00 7,00 3,1392 2,06766
78 1,00 7,00 3,3205 2,09200
79 1,00 7,00 3,4304 2,07354
79 1,00 7,00 3,4430 2,09240
79 1,00 7,00 3,5190 2,06845
79 1,00 7,00 3,5570 2,28005
80 1,00 7,00 3,6375 2,24027
79 1,00 7,00 3,6456 2,11247
78 1,00 7,00 3,7051 2,18084
79 1,00 7,00 3,7722 2,18942
80 1,00 7,00 3,8625 2,26556
80 1,00 7,00 4,2375 2,33977
80 1,00 7,00 4,2750 2,29460
80 1,00 7,00 4,3500 2,10545
79 1,00 7,00 4,3924 2,21543
79 1,00 7,00 3,69410 1,78139
DR in recruiting humancapitalDR in training of humancapital DR in selectingcooperation partnersDR in selectingsuppliersDR in determiningincentives and wagesDR in promotion andadvertisingDR in determining theproduct priceDR in determining theJV-organizationDR in marketingmanagementDR in productionmanagementDR in productmanagementDR in accounting andcontrollingDR in selecting lendersDR in financialmanagementDR in strategy buildingDR in selectinginvestment projectsDecision right index
N Minimum Maximum MeanStandarddeviation
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4. 3.2 Regression Analysis
H1: Decision Rights-Hypothesis:
To test the hypothesis we carry out an ordinal regression analysis with the index of decision
rights (DR) as independent variable (Chu, Anderson 1992): The explanatory variables refer to
joint venture partner’s knowledge advantage (KNOW), firm size (SIZE), age (AGE) and
technological uncertainty (UNCERT). Therefore, we estimate the following regression
equation:
DR = + 1KNOW+ 2SIZE + 3AGE + 4UNCERT
Based on our property rights hypothesis, DR varies positively with the JPI-know-how
advantage (KNOW). Further, we include three control variables: DR vary positively with the
following variables: SIZE due to economics of scale of coordination and monitoring, AGE
due to organizational learning and technological uncertainty (UNCERT) due to the
knowledge spillover risk.Hence 1, 2, 3 and 4 have a positive sign.
Results of the ordinal regressions are provided in table 3. The fit of the models was
based on the log of the likelihood ratio. For model 1 the chi-square value of 31.178 is
significant at p < 0.001 thus rejecting the null hypothesis that the estimated coefficients are
zero.The overall fit of the ordinal regression model point to the appropriateness of the set of
variables in predicting the distribution of residual decision rights in joint ventures. In model 1
the coefficients of intangible knowledge assets (KNOW) is highly significant and consistent
with our property rights hypothesis. The larger JV1-know how advantage, the more residual
decision rights are transferred to him. In addition, the coefficients of the control variables
(SIZE and UNCERT) have the expected positive sign and are significant. On the other hand,
AGE is not significant. Finally colinearity diagnosis was performed using correlations
between the independent variables (see table 4). 13
Model Statistics:N = 68Model Chi-square = 36.908 (p < 0.001)-2 Log likelihood = 217.796Nagelkerke R Square = 0.429
3,634**(1.778)
4,964***(1,796)
6.214***(1,837)
7.816***(1,91)
8,576***(1,949)
9,792***(2,025)
1,108***(0.261)0,437*(0.226)0,475
(0.354)0,659***(0,228)
2,514***(1,066)
*** p < 0.01; **p < 0.05; *p < 0.1; values in parentheses are standard errors.
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Table 6: 2SLS Results
Dependent Variable: Decision Rights (DR)
Independent Variables CoefficientsConstant
Intangible Knowledge Assets (KNOW)
Firm Size (SIZE)
Age of the Joint Venture (AGE)
Uncertainty (UNCERT)
Proportion of Ownership Rights (OR)
Model Statistics:N = 62F = 7,21 (p < 0.001)Adjusted R Square = 0.32
-2,65(2,46)
0,716***(0.177)0,258
(0,329) 0,554(0.341)0,433*(0,253)
3,73(5,872)
*** p < 0.01; **p < 0.05; *p < 0.1; values in parentheses are standard errors.
5. Discussion and Implications
The goal of the paper is to provide a property rights explanation of the allocation of residual
decision rights in joint ventures by emphasizing the joint venture partner’s intangible
knowledge assets as explanatory variables. This study presents the first empirical evidence
that the allocation of residual decision rights in joint ventures depends on the distribution of
intangible knowledge assets between the joint venture partners. First, we develop the
hypothesis that the joint venture partners’ residual decision rights directly vary with the
importance of his intangible knowledge assets to generate the ex post surplus. The data from
80 Hungarian joint ventures confirm the hypothesis that the joint venture partner’s intangible
assets positively influence the tendency toward a higher proportion of residual decision rights.
Second, we investigate the relationship between residual decision and ownership rights of the
joint venture partners. Our results are compatible with the complementarity view of the
governance structure (Milgrom, Roberts 1995; Jensen, Meckling 1992). In this case, the JV-17
partner’s motivation to use his intangible assets to generate residual income is increased if the
ownership rights are co-located with the residual decision rights. The data from 80 Hungarian
joint ventures partially support this hypothesis. In addition, compared to previous studies in
the international business literature, our study made an important contribution by
operationalizing JV-control through residual decision rights.
However, our empirical study has some limitations: First, although the database in the
survey sample is diverse, it remains far from a large and statistically random sample. Second,
while the empirical results provide some support for the proposed complementarity
relationship between residual decision and ownership rights, additional empirical evidence
would increase the generalizability of the results. Furthermore, future research has to
investigate the relationship between the allocation of decision rights and the performance of
the joint venture. Our property rights proposition suggests a positive relationship between the
complementarity of intangible assets and residual decision rights, on the one hand, and the
performance of the joint venture company, on the other hand.
This study also has managerial implications. The result of this study indicates that the
distribution of decision making authority in joint ventures must be based on the importance of
the JV-partners intangible knowledge assets for the creation of residual surplus. Therefore this
study provides companies with an explanation of a way to structure the residual decision
rights in joint ventures. The JV’s decision structure must be aligned with the JV-partners’
specific know how. High partner-specific know how under a low proportion of residual
decision rights may not generate a high residual surplus for the joint venture company,
because the joint venture partner does not efficiently use his intangible knowledge assets.
Conversely, low partner-specific know how under a high proportion of residual decision
rights is unlikely to maximize the residual income stream, because the joint venture partner
has not the capabilities to create a high residual surplus.
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APPENDIX: MEASURES OF VARIABLES
Intangible knowledge assets (KNOW): (ten items; Cronbach Alpha = 0,94): (no advantage 1 – 7 very large advantage) JV-partner 1’s know how advantage compared to JV-partner 2 evaluated by the joint venture manager concerning the following items:
(Production and logistics, recruiting, local market services, strategic planning, controlling, R&D, organization design, strategy formation, local market knowledge, local institutional knowledge)
Firm size (SIZE): Average sale value of the parent firm (per year)
Age of the joint venture company (AGE): Joint venture companies’ years of existence
Technological uncertainty (UNCERT) (one item):JV-manager has to evaluate technological uncertainty on a 5-point scale:Extent of technological changes: (1 – not at all; 5 – very large extent)
Decision rights index (DR) (Mean of 1. – 15): To which extent are the following decisions made by the JV-partner 1 compared to JV-partner 2? (no extent 1 – 7 to a very large extent)
(Recruiting, training, selection of cooperation partners, selection of suppliers, incentives and wages, promotion and advertising, investment projects, price decisions, organization structure and strategy, marketing, product management, production and procurement, accounting and controlling system, selection of lenders)
Ownership rights (OR): Percentage of asset ownership of the joint venture partners (= equity ratio)