April 1, 2008
Does greater trust improve financial performance of joint ventures in China? New research challenges conventional wisdom
Marketing literature often highlights the importance of trust in collaborative entities’ financial performance. However, new research on international joint ventures in China demonstrates the complexity of multilevel trust and warns that some types of trust can lead to negative outcomes.
The warning is particularly relevant as China has surpassed the United States to become the largest recipient of foreign direct investments, with more than $600 billion invested in 2005. Those billions are primarily channeled into international joint ventures: a marriage between a foreign parent company and a Chinese parent company resulting in a new collaborative entity.
The success of the joint venture or alliance hinges upon three complex relationships, according to Robert Palmatier, an assistant professor of marketing at the University of Washington’s Michael G. Foster School of Business. Palmatier and co-authors surveyed 114 international joint ventures in China over two years. Their research examines multiple levels of trust to untangle the differential roles and determine which types of trust have the strongest impact on financial performance.
The findings show that if there is strong trust between the parent firm and its representative (agency trust), the parent firm is more likely to invest resources in the venture. If there is strong trust between each parent firm’s representative in the venture (intra-entity trust), the result is greater cooperation.
Therefore, if significant resource investments are required, maintaining a high level of agency trust is critical and parent companies should carefully select and reward representatives to bolster their agency trust. If coordination is most critical, the selection and compensation of representatives should promote smooth and effective interactions within the venture. Parent companies should select representatives who are culturally similar to the other parent’s representatives and likely to develop trusting relationships.
“This is the first paper I have seen that examines multi-level trust in joint ventures by isolating the three relationships,” Palmatier explained. The paper illustrates that some trusts work synergistically; some build together to make things better and others work at cross-purposes.
“One of the primary reasons that international joint ventures fail is lack of relational trust,” Palmatier emphasized. “Most people will say that trust in a collaborative entity is good, but it’s more complex than that in an international joint venture. There are downsides to very tight relationships.”
The researchers found that too much trust can lead to complacency. If the representatives within the collaborative entities trust each other (intra-entity trust) and the parent organizations trust each other (organizational trust), it can lead to a lack of responsiveness to changing market conditions due to rigidity in thought and action.
“The idea that strong, trusting relationships reduce responsiveness is very important,” stressed Palmatier. “The business environment today is much more dynamic than in the past. You need trust to get people to cooperate, but realize that as they get better at cooperating, they will probably become more insular and less responsive to the environment.”
The research was published in the March issue of Journal of Marketing. Co-authors are Eric (Er) Fang, University of Delaware; Lisa K. Scheer, University of Missouri-Columbia and Ning Li of George Mason University.
###
For more information, contact Palmatier at (206) 543-4348 or palmatrw@u.washington.edu.
