Culture distance and foreign equity ownership in international joint ventures. Evidence from China
| Date | 05 October 2010 |
| DOI | https://doi.org/10.1108/17544401011084280 |
| Pages | 189-203 |
| Published date | 05 October 2010 |
| Author | Qiangbing Chen,Yali Liu,Lu Jiang |
| Subject Matter | Economics |
International
joint ventures
189
Journal of Chinese Economic and
Foreign Trade Studies
Vol. 3 No. 3, 2010
pp. 189-203
#Emerald Group Publishing Limited
1754-4408
DOI 10.1108/17544401011084280
Culture distance and foreign
equity ownership in international
joint ventures
Evidence from China
Qiangbing Chen
Department of Economics and Finance, East Tennessee State University,
Johnson City, Tennessee, USA
Yali Liu
Department of Mathematics, East Tennessee State University,
Johnson City, Tennessee, USA, and
Lu Jiang
School of Economics and Management, Tsinghua University, Beijing, China
Abstract
Purpose – The paper aims to study the impact of cultural differences on the ownership structure of
international joint ventures in China. It is reasoned that fo reign investors, when faced with larger
culture-related investment uncertainties, may have the incentive to acquire more control rights to
contain the risks by acquiring more equity shares in the joint ventures.
Design/methodology/approach – Data on international joint ventures in China were used to test
the theory. The data contain 941 observations from Beijing, Shanghai, Shenzhen and Tianjing,
covering a 13-year time span. Pooled ordinary least square is used in the model estimation.
Findings – Cultural distance between China and foreign countries was found to increase the foreign
equity share in the joint ventures, a finding contrary to traditional view. In addition, it was found that
cultural distance in different dimensions does not play an equal rolein affecting foreign equity shares. Last,
there is significant evidence that the allocation of ownership between foreign and domestic investors in the
joint ventures is influenced by the investor’s relative importance in supplying different types of resources.
Originality/value – The paper introduces a new perspective into the study of culture and
international joint venture. Foreign investors may be able to reduce investment risk by increasing
equity shares, which gives them more internal control, in international joint ventures. In contrast, the
traditional view is that larger cultural distance tends to discourage foreign equity ownership.
Keywords China, National cultures, Corporate ownership, International business, Joint ventures,
Equity capital
Paper type Research paper
1. Introduction
Since 1978, the year when China startedits market-oriented economicreform, the impact
of foreigndirect investment (FDI) on the Chinese economyhas been growing quickly. By
the end of year 2008, the accumulative amount of FDI flew into China was $875.3
billion[1]. Foreign-invested enterprises,firms funded by FDI, have become major players
in the Chinese economy. Internationaljoint venture is an increasing popular form of FDI.
In China, among 304,821 approved FDI projects between 1979 and 1997, 183,015 were
joint ventures; meanwhile, 51 percent of the total value of FDI was invested in joint
ventures (Bai et al.,2004). Due to the importance of international joint venturesin China,
the exploration on the factors that affect the ownership structure in these joint ventures
is significantwith regard to both theoreticaland practical concerns.
Researchers have found that many factors significantly influences on the foreign
ownership in international joint ventures, including firm characteristics, business
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