Innocents Abroad: The Hazards of International Joint Ventures with Pyramidal Group Firms

Abstract

The fundamental unit of production in microeconomics is the firm, which mirrors reality in the United States and United Kingdom. But elsewhere, business groups can be the more important unit for business strategy; not the firm. We examine international joint ventures in the telecoms industry in Brazil, where pyramidal groups are ubiquitous. We explain how corporate governance differences between agency behaviors in pyramidal groups versus freestanding widely held firms can lead to joint venture failures. We find joint ventures between pyramidal group-member firms and partners from countries where pyramids are rarer have significantly elevated failure rates; while joint ventures with partners from countries where pyramidal groups are ubiquitous are more likely to succeed. We provide clinical examples illustrating the mechanisms driving divergent partnership performance.

Keywords: Corporate governance, strategic alliance failure, pyramidal group ownership structure, foreign direct investment

JEL Classification: F23, G34, L96