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A Theory of Joint Venture Life-Cycles.

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International Journal of Industrial Organization 19 (2001) 319–343 www.elsevier.com / locate / econbase A theory of joint venture life-cycles Indrani Roy Chowdhury a , Prabal Roy Chowdhury b , * b a Jadavpur University, Jadavpur, India CSDILE, School of International Studies ( SIS), Jawaharlal Nehru University ( JNU), New Delhi, 110067, India Received 1 May 1998; received in revised form 1 February 1999; accepted 1 May 1999 Abstract In this paper we provide a dynamic theory of joint venture life cycle that relies on synergy, organisational learning and moral hazard. We demonstrate that depending on parameter values the outcome may involve any one of the following: stable joint venture formation, joint venture formation followed …show more content…

2 See Beamish (1985) and Gomes-Casseres (1987) for surveys of prior research on joint venture stability. 3 See Bhandari (1996–97), Business India (1992) and Ghosh (1996) for a description of these and other cases. 4 See, among others, Dymsza (1988), Miller et al. (1996) and Tomlinson (1970). Tomlinson (1970), for example, studies British joint ventures in India and Pakistan. He finds that one of the main reasons behind such ventures is the local resource supplied by the domestic partner. I. Roy Chowdhury, P. Roy Chowdhury / Int. J. Ind. Organ. 19 (2001) 319 – 343 321 theory.5 In order to keep things simple we assume that learning is both sided and symmetric. Thus, after learning occurs, the MNC can supply labour more cheaply than before, while the domestic firm can supply capital more cheaply. The final ingredient of our theory is moral hazard. We assume that input levels are non-verifiable and hence cannot be contracted upon. Thus, if a joint venture forms, then the partner firms cannot write a contract over the quantities of the inputs to be supplied. Hence both the firms have an incentive to free ride on the other, leading to a coordination cost for the joint venture. This is analytically crucial since, in the absence of any such costs, a joint venture always forms.6 We consider a dynamic two period model consisting of two firms, an MNC and a domestic firm. In every

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