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

57 Pages Posted: 4 Apr 2008 Last revised: 30 Jan 2013

See all articles by Susan Perkins

Susan Perkins

Northwestern University, Kellogg School of Management

Randall Morck

University of Alberta - Department of Finance and Statistical Analysis; National Bureau of Economic Research (NBER); European Corporate Governence Institute; Asian Bureau of Finance and Economic Research

Bernard Yin Yeung

National University of Singapore - Business School

Multiple version iconThere are 2 versions of this paper

Date Written: April 2008

Abstract

The fundamental unit of production in microeconomics is the firm, and this mirrors reality in the United States and United Kingdom. But elsewhere, business groups can be the more important unit, for business strategy is often formulated at the business group level, not the firm level. In many countries, this is legally enshrined in corporate governance codes that assign officers and directors a duty to act for their business group, not their firm or its shareholders. Even where a duty to individual firms' shareholders exists, business groups often have pyramidal structures of intercorporate blockholdings that entrench controlling shareholders, usually wealthy families, who run their groups to maximize their utility. This can impose exacerbated agency problems. In either case, foreign joint venture partners who expect domestic firms to maximize shareholder value can be sorely disappointed. We explain agency behavior in business groups and how controlling insiders can divert resources between firms they control, including joint ventures, to enrich themselves; and highlight differences between this behavior and agency problems in freestanding firms. We then examine the telecoms industry in Brazil, a country in which most large businesses belong to pyramidal business groups controlled by wealthy families. We find that joint ventures between Brazilian telecoms firms and partners from countries where business groups are rarer have significantly elevated failure rates; while joint ventures with foreign partners from countries where pyramidal groups are more common are more likely to succeed. We then present clinical examples illustrating the mechanisms that drive such divergent performance in joint venture partnerships. While our results are based on a single industry in a single country, we believe they highlight a previously unexamined important issue in international business strategy.

Suggested Citation

Perkins, Susan and Morck, Randall K. and Yeung, Bernard Yin, Innocents Abroad: The Hazards of International Joint Ventures with Pyramidal Group Firms (April 2008). NBER Working Paper No. w13914. Available at SSRN: https://ssrn.com/abstract=1116590

Susan Perkins

Northwestern University, Kellogg School of Management ( email )

2001 Sheridan Road
LEV 3100
Evanston, IL 60208
United States

Randall K. Morck (Contact Author)

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada
780-492-5683 (Phone)
780-492-3325 (Fax)

National Bureau of Economic Research (NBER)

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European Corporate Governence Institute ( email )

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Asian Bureau of Finance and Economic Research ( email )

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1 Business Link
Singapore, 117592
Singapore

Bernard Yin Yeung

National University of Singapore - Business School ( email )

15 Kent Ridge Drive
BIZ 1 Level 6
Singapore, 119245
Singapore
65 6516 3075 (Phone)
65 6779 1365 (Fax)

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