International Joint Venture Governance Mechanisms: The Role of Institutional Environment on Contract Design

Abstract

Research Question/Issue: What contract provisions and clauses should be emphasized in international joint venture (IJV) contracts to mitigate the challenges arising from the host country's institutional environment? This study examines how the institutional environment of the host country influences the design of IJV contracts and their governance. Research Findings/Insights: We analyzed 23 contract provisions and clauses across 390 IJVs established between 2000 and 2016. Our findings indicate that control clauses detailing legal remedies and safeguards are used more frequently in host countries with more flexible and less formalized legal systems. Additionally, management structure clauses specifying internal governance mechanisms are more often used when contract enforcement in the court of a host country takes longer. Furthermore, host countries that lack abilities to control corruption increase the use of management structure clauses in IJV contract agreements. Theoretical/Academic Implications: By delving into the IJV contract structure, this study enhances our understanding of the role of a host country's institutional environment in the use of different types of IJV contract provisions/clauses. Practitioner/Policy Implications: Alliance negotiators and practitioners should be aware of the contract clauses that are particularly essential in specific foreign legal environments. Management structure clauses should be incorporated more often when the foreign nation is prone to corruption, government favoritism, and inefficient legal processes. The greater use of control clauses is necessary when the host country controls corruption well and the legal system is less formalized.