International Journal of Managerial Finance

Joint ventures between US MNCs and foreign governments

Mina Glambosky Kim Gleason Joan Wiggenhorn

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Mina Glambosky Kim Gleason Joan Wiggenhorn, (2011),"Joint ventures between US MNCs and foreign
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IJMF
7,3

Joint ventures between US MNCs

and foreign governments

238

Lynn University, Boca Raton, Florida, USA

Mina Glambosky
Kim Gleason
Florida Atlantic University, Boca Raton, Florida, USA, and

Received 21 April 2010

Accepted 14 June 2010

Joan Wiggenhorn

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Florida Institute of Technology, Melbourne, Florida, USA

Abstract
Purpose The purpose of this paper is to determine the initial stock price reaction and long-run
returns for joint venture announcements between US MNCs and foreign governments as well as the
firm characteristics and political risk factors of the foreign governments that affect the abnormal
returns. In addition we determine changes in total and systematic risk following the joint venture.
Design/methodology/approach Announcement abnormal returns are calculated using event
study cumulative abnormal returns. Long-run returns use a buy and hold methodology. Cross section
regressions are performed on both the announcement and long run returns.
Findings Announcement abnormal returns are a positive 0.37 percent; however, the long-run
returns are a significant 23.99 percent the end of the first year. Both short-run and long-run returns
are higher when the level of internal conflict is low, and surprisingly when the level of corruption is
high. Also, surprisingly, short-run returns are higher when ethnic violence is higher, but, as expected,
long-run returns are higher when there is higher democratic stability.
Research limitations/implications One implication is that when US managers are confronted
by foreign government corruption, there may be a conflict between the success of the project and the
ethical/legal requirements of the company.
Originality/value The paper focuses on joint ventures with foreign governments rather than the
usual foreign companies. Also, unlike previous papers that have used only one measure of political
risk, this paper uses five of the PRS categories of political risk.
Keywords Joint ventures, Internationalization, Political risk, Event study, International business,
Risk analysis, Multinational companies
Paper type Research paper

International Journal of Managerial

Finance
Vol. 7 No. 3, 2011
pp. 238-258
q Emerald Group Publishing Limited
1743-9132
DOI 10.1108/17439131111144450

1. Introduction
The international economy is a dynamic landscape in which US multinational
enterprises compete. In such a rapidly changing environment they are utilizing all
available means to generate a profit. The use of international joint ventures (IJV) is
seen as a viable method to increase alliances worldwide. Many US multinational
enterprises have entered into IJVs with foreign corporations. Previous research has
shown that this strategy can prove successful under the right circumstances. This
paper distinguishes itself in that it examines joint ventures between US MNEs and
foreign governments. The state of foreign governments has been continuously
changing; the emergence of less developed countries as key players in the world

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economy has been observed. As access to previously closed markets arises, US

multinationals look to take advantage of new opportunities.
However, the case of an international joint venture with a foreign government
presents unique issues. In a typical joint venture with a domestic or foreign partner the
market has access to public information, which facilitates the valuation process. There
is less public information about the operations of a foreign government as a partner in
a joint venture. During the negotiation process between the US MNE and the foreign
government the details of the IJV are defined, but full market disclosure may not occur.
The opacity of the process confounds the valuation in the market.
Also, joint ventures with foreign countries present some unique risk. If a foreign
corporation reneges on an agreement, there is at least some hope that the foreign
government may intervene. However, joint ventures with the foreign government itself
can have no such expectations. This paper examines the firms characteristics as well
as several political risk characteristics of the foreign government IJV partner to explain
the valuation effect of the joint venture announcement on the US MNE.
Our results show that the announcement day abnormal returns are 0.37 percent,
significant at the 0.1 percent level. For firms that complete the IJV, the one-year buy
and hold abnormal returns are 2 3.99 percent, significant at the 1 percent level. The
results for companies not completing the deals are even worse, with one year returns of
2 6.64 percent increasing to 2 12.66 percent for the two-year returns, significant at the
0.1 percent level. We examine the characteristics of both the US MNE and the foreign
government to ascertain when the returns are most favorable. In the short run, we find
that the only firm variable that is significant is the ratio of intangible assets to total
assets, resulting in a positive effect. For the announcement returns, the foreign
governments characteristics that are more favorable are less internal conflict, more
investor protections, and surprisingly more ethnic tension. The results for the long-run
buy and hold returns also show the positive effect of less internal conflict, but
surprisingly, the greater the corruption, the higher the BHARs. Lastly, we measure the
change in both total and systematic risk for the joint ventures and determine that the
while there is no difference in the overall sample, government controlled JVs result in
significantly more systematic risk as do those with the higher corruption levels.
Our paper has several contributions. First, to date there have been very few studies
that examine joint ventures with foreign governments (Rondinelli and Black, 2000;
Gleason et al., 2005). Second, in the examination of the countrys political risk, we use
the International Country Risk Guide as provided by the Political Risk Services Group
(n.d.). This is one of the most comprehensive ratings, first developed in 1980. We
incorporate five of the political risk factors in investigating which of the factors
contribute to a successful joint venture with a foreign government. Slangen and van
Tulder (2009) find that political risk is only one aspect of the formal external
environment, and we believe that having more specificity concerning political risk is
beneficial. Previous papers have used only one measure of political risk and we find
differences in the abnormal returns for the different factors, signifying that a single
variable does not provide that same amount of specificity. Third, we use an extended
period of time and thus investigate many new joint ventures, not previously examined,
plus we test for abnormal returns in the long run. Last, we measure the changes in total
and systematic risk following the joint venture. The remainder of this paper is in five
parts: Section 2 describes the relevant literature while Section 3 develops the

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MNCs and
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240

hypotheses. Section 4 describes the data and details the methodology. Section 5 states
the empirical results and Section 6 details the conclusions.
2. Literature review
2.1 Research on joint ventures
An extensive body of previous research exists for joint ventures. In particular, three
motivating factors have been investigated in regards to joint ventures. The first is that
the joint venture is motivated by strategic factors, taking advantage of market power
and operating efficiency (Pfeffer and Nowak, 1976; Rockwood, 1983). Firms strategic
motivations are driven by the idea that the joint venture can capitalize on their abilities
to offer products and services that are distinguishable from their competitors or from
what they could offer independently of each other. The second motivation focuses on
the effectiveness of the joint venture. These studies focus on the environment in which
the joint venture will have the greatest impact and what will be impacted the most,
documented by McConnell and Nantell (1985) and Woolridge and Snow (1990). Finally
there is the theory of efficiency in governance, suggesting that the joint venture is
motivated by the superiority of the joint venture as a governance mechanism and belief
in its ability to reduce costs (Hennart, 1988; Kogut, 1988). Hoffmann and
Schaper-Rinkel (2001) conclude that while neither acquisitions or joint ventures are
inherently superior, joint ventures tend to be more favorable in the face of high
environmental uncertainty and knowledge dispersion because collaborations increase
strategic flexibility and rapid learning.
2.2 Research on political risk and FDI
With the rapid globalization of the worlds economies, there is increased emphasis on
foreign FDI and JVs. The first articles dealing with foreign direct investment are about
firm performance and whether or not international acquisitions create value (Morck
and Yeung, 1991; Doukas and Lang, 2003). Shleifer and Vishny (1993) explore why
corruption, defined as the sale by government officials of government property for
personal gain (p. 599), may be costly to economic development. Wei (2000a) shows
that FDI may be more discouraged by corruption than taxes. Desbordes (2010) finds
that both global and diplomatic political risks matter for US MNEs investing in
developing countries. The effects of political risk are not just felt on stock performance
but also on the cost of debt (Qi et al., 2010). Also, studies show that mode entry is at
least partially determined by the level of corruption, and that in many cases joint
ventures become the more desirable method of entry ( Javorcik and Wei, 2009;
Uhlenbruck et al., 2006).
2.3 Research on international joint ventures
A few studies have focused on the characteristics that support the formation of joint
ventures over acquisitions (Kaynak et al., 2007; Gleason and Wiggenhorn, 2007; Oviatt
and McDougall, 1997). Several studies have focused on the risk involved with either
international alliances or acquisitions (Paik, 2005; Fazzi, 2006; Kwok and Tadesse,
2006; Agarwal and Feils, 2007; Dai, 2008). In general, however, previous research has
documented the creation of positive valuation upon the announcement of an
international joint venture (Franko, 1989; Mjoen and Tallman, 1997; Pan and Li, 2000;
Makino and Neupert, 2000).

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The formation of JVs with foreign governments presents some unique challenges.
Geringer and Hebert (1989) focus on the control and performance of IJVs, stating that
the IJV inevitably complicates the corporations life. Insch and Steensma (2006) stress
the importance of government business partners and that these relationships have
grown dramatically. Studying alliances and acquisitions in Central and Eastern
Europe, Rondinelli and Black (2000) emphasize that MNEs must foster a win-win
arrangement for both the corporation and the host country in order to succeed. In a
study of US MNEs joint ventures in China the level of uncertainty was found to be
inversely related to the value created (Shan, 1991).
The involvement of the government in the joint venture process has been found to
have a negative impact in a study of joint ventures in Eastern Europe (Brouthers and
Bamossy, 1997). Studies have shown that the presence of a key stakeholder, namely the
government, influences the valuation of an international joint venture, as documented
by Tallman and Shenkar (1994) and Yan and Gray (1994). Examining Spanish firms,
Lopez-Duarte and Garcia-Canal (2007) find that the stock market reaction to foreign
direct investments is positive, but depends on both the entry mode as well as the FDI
attributes. These studies, however, concern joint ventures with foreign companies, not
foreign governments as our study does. Rodrguez (2008) provides a model that shows
that the greater the level of hazard expropriation, the lower the participation of the
MNE in the final cash flow. His results are for foreign firms, but it seems reasonable
that the risk would be even greater when the partner is the foreign government itself.
Slangen and van Tulder (2009) show that many factors affect the uncertainty
surrounding FDI. Our study incorporates several risk factors, not just corruption as in
previous studies.
3. Hypotheses
3.1 Joint venture announcements and short-run abnormal returns
As discussed earlier, previous studies have shown positive returns for joint venture
activities with foreign corporations (Franko, 1989; Mjoen and Tallman, 1997; Pan and
Li, 2000; Makino and Neupert, 2000; Lopez-Duarte and Garcia-Canal, 2007). We
therefore hypothesize that:
H1. MNCs undertaking joint ventures with foreign countries will experience
positive announcement abnormal returns.
3.2 Joint venture announcements and long-run abnormal returns
To date, there has only been one previous study of long run returns and international
joint ventures with foreign countries. Gleason et al. (2005) find that overall 18 month
returns are 2 4.21 percent. Although our sample period is different, we would expect
similar results, so our hypothesis is:
H2. MNCs undertaking joint ventures with foreign countries will experience
negative BHARs.
3.3 Hypotheses regarding the variation in valuation effects
Due to the nature of partnering with a foreign government the market has limited
information on the joint venture. The information on the operations of the foreign
government is not as readily available as it would be in the case of a joint venture with

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MNCs and
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242

another MNE. The restricted information does not preclude the market from
attempting to asses the value of the joint venture. To distinguish between IJVs that add
value and those that do not, various characteristics of the US MNE partner and
political risk factors are examined.
In the examination of the countrys political risk, we use the International Country
Risk Guide as provided by the Political Risk Services Group. There are 12 factors that
the ICRG evaluates:
(1) government stability;
(2) socioeconomic conditions;
(3) investment profile;
(4) internal conflict;
(5) external conflict;
(6) corruption;
(7) military in politics;
(8) religious tensions;
(9) law and order;
(10) ethnic tensions;
(11) democratic accountability; and
(12) bureaucracy quality.
The factors are rated on scales of 1-4, 1-6, or 1-12 points, with the highest number of
points indicating the lowest potential risk for that component and the lowest number
indicating the highest potential risk. While we tested all 12 factors, we found five
factors that significantly affected either the announcement or the buy and hold
abnormal returns. The firms characteristics with hypotheses are presented first,
followed by the five political risk factors of the foreign country.
3.3.1 Size of US MNE. Elango (2006) finds that market size contributes positively to
cross-border acquisitions. However, Doukas and Lang (2003) find that for foreign
acquisitions, the larger firms experience lower, but insignificant, abnormal returns, as
do Gleason and Wiggenhorn (2007). While larger firms have access to larger deals,
more capital and better resources, smaller firms may benefit more from joint ventures
since they are more capital-restricted. Therefore, the impact of Size is uncertain.
3.3.2 Percentage of the joint venture owned by the firm. The belief is that the greater
the percent of the joint venture owned by the firm, the higher the abnormal returns.
This belief is partially confirmed by Tekin-Koru (2006) who finds that the share of
foreign ownership declines with the level of corruption, and presumably, corruption
will be an issue for many of the IJVs in our sample. While there is a possibility that the
market might perceive that the firm has accepted undue risk and hence, lower returns,
we nevertheless assume that the greater the control that the firm maintains, PCTOWN,
the greater the likelihood of success.
H3. The greater the percentage of the joint venture owned by the firm, the higher
the abnormal returns.

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3.3.3 Intangibility. Several papers find a relationship between the likelihood of

internationalization and intangibility. Examining abnormal returns for FDI
announcements into the republics of the former Soviet Union, Gleason et al. (1999)
find that firms with higher R&D have higher returns.
On the other hand, Gleason et al. (2006) find that purely domestic firms have more
intangible assets than firms considered multinational traders or global startups, and
Gleason et al. (2005) find that while intangibility affects a firms decision to acquire a
government unit, it does not significantly affect a firms decision to enter into a joint
venture. Examining investments by US firms in transition economies, Paul and
Wooster (2008) hypothesize that US firms with high R&D are both likely to delay entry
into transition economies and when they do enter, these firms will have a high-equity
commitment. However, neither of their hypotheses is supported. While the findings in
previous research are mixed, we nevertheless hypothesize that INTANG is positively
related to returns.
H4. Firms with higher intangibility will earn higher abnormal returns.
Below is a detailed listing of the PRSs government and firm characteristics used to
assess the variability in value of the sample of joint ventures. We also provide statistics
on the mean and median values for each of the variables as well as the correlation
coefficients between them in the Appendix. Although some of the names of the
variables may have a negative connotation, it is important to understand that for each
of the variables, the higher the number of points, the lower the risk. Since we
hypothesize that each of these factors will have a positive effect on the abnormal
returns; the higher the score, the result should be less risk and higher returns.
3.3.4 Government democratic accountability. Democratic accountability represents the
degree to which the governments conduct fair and free elections and their
responsiveness to their constituency. A failure to respond to its peoples demands,
i.e. refusing to operate in their best interests, exposes the government to ejection.
Jensen and Young (2008) find that democracy significantly affects the perception of
risk. Strong positive signaling effects from democracy are found by Biglaiser et al.
(2008). Qi et al. (2010) find that political rights (i.e. democratic reforms) are
significantly and negatively related to the cost of debt of firms across countries,
because political rights facilitate the protection of minority shareholder and claimant
rights. Entering into a joint venture with a government with low levels of democratic
accountability increases the risk for the US MNE partner. Therefore, the valuation
effects on the US MNE are expected to be more favorable when partnering with
governments with higher levels of democratic accountability. The variable used for
democratic accountability is DEMOC, as measured by the democratic accountability
score up to 6 points.
3.3.5 Government corruption. Corruption creates instability placing all of the
partners at risk (Bardhan, 1997; Goudie and Stasavage, 1997; Shleifer and Vishny,
1993, Windsor and Getz, 1999; Gleason et al., 2005). In the case of US MNEs entering
into IJVs with foreign governments, political corruption puts their investment at a
higher risk. This corruption takes many forms and affects many areas. It may lead to
inappropriate leadership on the government side of the joint venture, i.e. unqualified
candidates selected for dishonest reasons such as patronage. Meschi (2009) finds that
both the level and the variation in the level of corruption affect the terminations of the

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244

IJVs. The positive return that the joint venture announcement is posited to create will
be reduced by partnering with governments with higher levels of corruption. A corrupt
government may not fully disclose all the information about the partnership to the US
MNE. Market perception of the joint venture may be skewed due to perceived or actual
corruption. The variable used for corruption is CORRUPT, with a maximum of 6 points
for the least corruption.
3.3.6 Government investment profile. The governments attitude toward investment
in their country will impact the value created by the joint venture. A positive attitude
will place the US MNE in a stronger position and facilitate their creating value. A
governments investment profile measures the governments attitude and policies
regarding: the risk to operations, taxation, repatriation, and labor costs. Younas (2009)
finds that an improvement in institutional quality that strengthen the legal system
increases capital flows to developing nations. Governments that are more open to
foreign investment will create policies that facilitate the US MNEs joint venture
operations. Governments with unfriendly polices may create situations where the
operations are at risk. Chan et al. (2008) find that there is greater variation in foreign
affiliate performance when there is a low level of institutional development. Both
secure property rights and corporate transparency are required to increase investment
growth (Durnev et al., 2009). Ultimately, the risk of repatriation and total seizure of
operations may act as an insurmountable obstacle to a joint venture. Therefore, the
valuation effects for the joint venture should be favorable when the governments
stance toward foreign investment is more favorable. The government views on
investments are measured by the indicator investment, INVPRO, with a maximum of
12 points.
3.3.7 Internal conflict. This is an assessment of the political violence in a country
and its impact on governance. The lowest ratings are for countries that have an
ongoing civil war. The highest ratings are for countries in which there is no armed or
civil opposition to the government. Alesina and Perotti (1993) find that socio-political
instability, by creating uncertainty in the politico-economic environment, reduces
investment. Fielding (2004), in a study on investment during the Intifada in Israel,
finds that there is a strong link between the intensity of the Israeli-Palestinian conflict
and capital flight. In our study, the total score ranges from 0 to 12 and the variable
name is INTCONF. The supposition is that countries that currently have civil unrest
will endanger any joint ventures and thus have lower abnormal returns.
3.3.8 Ethnic tensions. This is a measure of the degree of tension in a country
attributable to racial, nationality, or language divisions. Lower ratings are for countries
where tensions are high and compromise unlikely while higher ratings are for
countries, that while differences may exist, the tensions are minimal. Easterly and
Levines (1997) results lend support that interest group polarization leads to
rent-seeking behavior and reduces long-run growth. Evrensel and Kutan (2007) find
that ethnic violence is detrimental to FDI, and the greater the tensions, ETHNIC, the
lower the abnormal returns.
4. Methodology and sample
4.1 Sample
The sample of joint ventures in this study was taken from the Securities Data
Corporation (SDC) joint ventures database. The search included 1,655 joint venture

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announcements between 1985 and 2004, where the joint venture partner(s) was listed
on the New York Stock Exchange, American Stock Exchange, or NASDAQ. The
sample was then reduced to 1,104 announcements in which returns data were available
from CRSP. Accounting information was obtained from Research Insight. Political risk
data were obtained from PRS Group, which supplies economic and political risk
factors.
Sample descriptive statistics are shown in Tables I and II. Table I provides the
sample breakdown by year, while Table II provides the distribution by target SIC code.
As indicated in Table I, the largest number of joint ventures took place in 1991, with
14.66 percent of the sample. The second and third most popular years for joint ventures

Total sample

1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Total announcements

4
3
10
10
13
96
189
108
122
154
108
69
82
87
55
53
55
32
25
14
1,289

0.31
0.23
0.78
0.78
1.01
7.45
14.66
8.38
9.46
11.95
8.38
5.35
6.36
6.75
4.27
4.11
4.27
2.48
1.94
1.09
100

Number of announcements

Percentage of total

251
183
307
228
68
62
117
56
10
6
1,289

19.47
14.20
23.82
17.69
5.28
4.81
9.08
4.34
0.78
0.54
100.00

1000-1999
2000-2999
3000-3999
4000-4999
5000-5999
6000-6999
7000-7999
8000-8999
9000-9999
Other
Total announcements

245

Number of announcements
Percentage of total

Year of announcement

SIC code

Joint ventures:
MNCs and
governments

Table I.
Announcements of joint
ventures by year

Table II.
Announcements of joint
ventures by SIC code

IJMF
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246

were 1994 (with 11.95 percent of the sample) and 1996 (with 9.46 percent of the sample).
Table II indicates that the largest number of joint ventures, comprising 23.82 percent of
the sample, took place in the machinery sector (SIC Code 3000-3999);
mining/construction (SIC Code 1000-1999) and transportation (SIC Code 4000-4999)
accounted for 19.47 percent and 17.69 percent of the sample, respectively. Table III
provides descriptive statistics regarding MNE characteristics. The US MNEs are large,
with a mean (median) size represented by total assets of $42.266 ($13.499) billion and a
mean (median) market value of $25.291 ($8.822) billion. The MNEs are profitable, with
mean (median) returns on equity of 9.80 percent (13.47 percent).

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4.2 Short-run valuation effects

To estimate the market reaction on partners in government joint ventures, event study
methodology is used. The event day is the announcement of the joint venture. The
ordinary least squares (OLS) market model is used to calculate the returns. The
cumulative abnormal returns (CARs) over the selected event window represent the
average abnormal returns over the t day event windows. A 110-day estimation period
was chosen immediately preceding the 21-day ( 10 to 2 10) event window. Abnormal
returns for the (2 1, 0) (2 1, 1) and (0, 0) windows are estimated and examined, with
day 0 representing the announcement day. The CRSP equally weighted index is used
as the market proxy and the analysis was done using Eventus (Cowan, 1999).
4.3 Long-run valuation effects
The long-run effects of the joint venture on the US MNE utilize a buy and hold
strategy. The long-run abnormal returns are calculated for the six month, one year,
18 months, two and three year periods:
T
Y

RT 1 Rit =nt
2 1;

t1

where RT is the abnormal return over the event period of six, 12, 18 months, etc., Rit is
the abnormal return on stock i in month t and nt is the number of companies that are
included in each month (Barber and Lyon, 1997).

Variable
Assets ($millions)
Market value ($millions)
ROA
ROE
Debt to total assets
Cash and cash equivalents to total assets
Table III.
Firm characteristics

Mean

Median

44,983.90
47,288.63
0.43
4.99
26.49
0.06

15,950.00
18,635.16
3.66
13.13
24.56
0.03

Note: This table documents the mean and median values for the corporate partner in the joint venture
in the year of the acquisition

4.4 Variation in the short- and long-run returns

To test for the factors that contribute to a successful joint venture, regressions are run
using both the short- and long-run abnormal returns as the dependent variables. Some
of the independent variables measure the stability and soundness of the foreign
government, while others measure firm specific factors. Each of the factors was
discussed in more detail earlier in the hypotheses section. The regression equation is:
AR b0 b1 SIZE b2 PCTOWN b3 INTANG b4 DEMOC b5 CORRUPT

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b6 INVPRO b7 INTCONF b8 ETHNIC

where AR is the the cumulative abnormal returns for announcement returns and buy
and hold abnormal returns for long-run returns; SIZE is the market value/total assets
of the US MNE joint venture participant; PCTOWN is the percentage owned by the US
MNE; INTANG is the ratio of intangible assets to total assets for the US MNE; DEMOC
is the point measurement of democratic stability; CORRUPT is the point measurement
of government corruption, with highest points for the least corruption; INVPRO is the
point measure of governments attitude towards investor protection; INTCONF is the
point measure of political violence with the highest points being the least violent; and
ETHNIC is the point measure of ethnic violence with the highest points being the least
unrest.
4.5. Changes in risk profile following JVs with governments
An examination of the impact of a government joint venture on the risk profile of a US
MNE is included. Two measures of risk i.e. total and systematic are estimated 180
days before and after the joint venture announcement. The two risk measures are
observed to determine if the risk of the US MNE shifted in the year following the joint
venture. Total risk is measured by the standard deviation and b, while systematic risk
is a measure of the covariance of returns between an asset and the market,
standardized by the markets own variance. b can be rewritten as follows:

bi ri;m sj =sm ;
where ri,m is the correlation coefficient between the return on asset i and the market, si
is the standard deviation of firm is returns, and sm is the standard deviation of the
market returns. A benchmark sample is constructed composed of the S&P 500 firms,
since our firms are also large. The risk measures are calculated over the same time
period. This allows us to investigate whether the participation in government joint
ventures impacted the risk of the US MNE firms.
5. Results
5.1 Short-run valuation effects
The valuation effects from the event study are reported for the total sample and by
transaction type (government control status, completion status) in Table IV. For the
event day (0, 0), the abnormal return to the US MNE participant in the joint venture is
0.37 percent, significant at the 0.001 level. For the average firm, with a market
capitalization of $47bn, this represents a gain to shareholders of $17.39m. The
announcement abnormal returns are also positive and significant for the two-day and

Joint ventures:
MNCs and
governments
247

IJMF
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Sample type

No.

(0, 0)

(21, 0)

(2 1, 1)

Total sample

1,289

0.37%
(3.32) * * * *
1.00%
(1.44)
0.34%
(3.31) * * * *
0.42%
(3.40) * * * *
0.25%
(1.34)

0.32%
(2.57) * * *
0.42%
(0.65)
0.31
(2.49) * *
0.32%
(2.25) * *
0.30%
(1.25)

0.30%
(2.23) * *
0.20%
(0.28)
0.31%
(2.23) * *
0.35%
(2.26) * *
0.18%
(0.64)

Government control

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248

Table IV.
Abnormal returns by
transaction type

Not-government control

60
1229

Completed

947

Not-completed

342

Notes: This table provides the cumulative abnormal returns upon announcements for the (0, 0),
(21, 0), and (21, +1) event windows. Abnormal returns are calculated using the market model
estimated from 110 to 11 days prior to the event announcements. CARs represent the cumulative
market model-adjusted abnormal returns over the relevant event window. The CRSP equally weighted
market index is used. The symbols *, * *, * * *, and * * * * denote statistical significance at the 10
percent, 5 percent, 1 percent and 0.1 percent levels, respectively, using a two-tailed test

three-day windows. Thus, the valuation effects of the joint venture participant are
positive on average, and significant. These results support the hypothesis that US
MNEs benefit from participating in joint ventures with foreign governments.
These results may be attributable to the unique strategic abilities of the joint
venture entities, namely, the efficiency in operations of the MNE and the strengths of
the foreign government with access to local suppliers and markets. The variation in the
returns is examined below in more detail.
5.2 Impact on valuation by sub-sample: government control versus non-government
control
Dividing the sample of joint venture announcements according to the stake that the
government retains provides some interesting insights. The majority of joint venture
announcements result in the foreign government retaining minority ownership. When
the event study is run for the divided sample the results show that the joint ventures
not under government control create significant positive abnormal returns at the 0.1
percent level of significance. For the (0, 0) one-day event window mean cumulative
abnormal returns were a significant positive abnormal return of 0.34 percent. When the
government retains controlling interest of the joint venture the announcement creates a
return that is insignificantly different from zero.
5.3 Impact on valuation by sub-sample: completed versus non-completed
The majority of joint venture announcements resulted in a completed joint venture
agreement. When the sample is divided into completed versus non-completed joint
ventures the results show that the joint ventures that proceed to completion create a
significant positive abnormal returns at the 0.1 percent level of significance. For the
(0, 0) one-day event window mean cumulative abnormal returns were a significant
positive abnormal return of 0.42 percent. When the joint venture announcement fails to
result in a completed partnership, the US MNEs experience returns insignificantly
different from 0.

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5.4 Long-run valuation effects

The effects of the joint venture announcement on the long-run value of the US MNE are
documented in Table V. Table V indicates that for completed joint ventures, the results
show significant negative abnormal returns for the US MNE participant in three time
periods. The size of the negative returns is much larger than the corresponding
announcement returns. While the joint venture created a mean return of 0.32 percent
over the two-day time period, the BHARs are 2 3.99 percent for completed deals after
one year. These results support the hypothesis that hstated that the joint venture
would create significant negative long-run abnormal returns for the US MNE. They are
also similar in size to those found by Gleason et al. (2005). What is somewhat
surprising is that the negative abnormal returns for those firms that did not complete
the joint venture are also negative and much larger than those for the completed
ventures. Apparently, once announcing the joint venture, firms do better to complete
them. Uncompleted returns reach a maximum of 2 12.66 percent at the 0.001
significance level for the 24-month returns.

Joint ventures:
MNCs and
governments
249

5.5 Variation in short-run valuation effects

The results of the multivariate analysis are shown in Table VI. The models use five of
the PRS Groups International Country Risk Guide variables for Political Risk as well
as several firm specific variables. The SIZE variable is insignificant in all the
announcement models, for both market capitalization as well as total assets. Similarly,
the PCTOWN, the percentage owned by the MNE is insignificant. The ratio of
intangible assets to total assets, INTANG is positive and significant in the first model.
While previous studies (Gleason et al., 1999; Paul and Wooster, 2008) have had mixed
results, the positive coefficient for intangibility does make sense. Those firms with
more patents, R&D, branding, etc., can more easily exploit their advantage compared
to firms that have significant fixed assets.
The second half of the model includes the foreign government characteristics that
attempt to measure the impact of the risk factors on value creation. To check for
possible problems with multicollinearity, the variance inflation factors (VIFs) were
calculated and all were less than 2.5, which indicates that multicollinearity is not a
Sample type

No.

(1, 6)

(1, 12)

(1, 18)

(1, 24)

(1,36)

Total sample

1,289

22.64%
(22.98) * * *
20.97%
(20.36)
22.72%
(23.27) * * *
22.07%
(22.15) * *
24.22%
(22.78) * * *

2 4.69%
(2 3.78) * * *
2 8.12%
(2 1.62)
2 4.52%
(2 3.42) * * *
2 3.99%
(2 2.79) * * *
2 6.64%
(2 2.37) * * *

24.72%
(23.05) * * *
29.08%
(21.52)
24.46%
(22.81) * * *
23.44%
(22.10) * *
28.23%
(22.26) * *

25.61%
(23.00) * * *
21.74%
(20.19)
25.80%
(23.05) * * *
23.07%
(21.41)
212.66%
(23.51) * * * *

2 3.80%
(2 3.05) * * *
1.74%
(1.36)
2 4.82%
(2 1.97) * *
2 1.09%
(2 1.41)
2 11.32%
(2 1.77) *

Government control

60

Not government control 1,229

Completed deals

945

Non-completed

340

Note: This table provides the mean percentage, t-test statistics and p-values for the long-run buy and
hold abnormal returns. The symbols *, * *, * * *, and * * * * denote statistical significance at the 10
percent, 5 percent, 1 percent, and 0.1 c levels, respectively, using a two-tailed test

Table V.
Long-run abnormal
returns by transaction
type

Table VI.
Cross-sectional
regressions on abnormal
returns

485

1,288

0.009
3.23 * * *

20.000
(20.32)
20.002
(21.67) *
0.001
(1.32)
0.003
(3.19) * * * *
20.003
(22.14) * *

(21, 0)
20.01
(21.58)

510 includes only

complete

0.021
2.80 * *

0.065
(2.24) * *
20.074
(21.97) * *
20.025
(21.41)
0.062
(2.41) * *
20.009
(20.24)

456 includes only

complete

0.035
3.052 * * *

20.246
(20.89)
0.049
(1.78) *
20.100
(22.68) * * *
0.017
(0.89)
0.078
(3.22) * * * *
20.024
(20.73)

(1, 24)
20.663
(23.39) * * * *
20.000
(20.35)
0.001
(0.673)

(1, 24)
20.451
(22.42) * *

0.000
(0.92)

Model 4

Model 3

914 includes only

complete

0.016
3.535 * * *

0.384
(2.125) * *
20.056
(22.22) * *
20.015
(21.15)
0.051
(3.04) * * *
20.002
(20.10)

(1, 24)
20.400
(23.14) * * *
0.000
(1.821) *

Model 5

0.015
3.72 * * * *
1,241 includes
complete and non
complete

0.031
(1.98) * *
20.019
(20.86)
20.007
(20.66)
0.042
(2.93) * * *
20.008
(20.38)
0.081
(1.98) * *

(1, 24)
20.515
(24.58) * * * *
0.000
(0.71)

Model 6

Notes: This table provides the results of multivariate regression where the dependent variable, AR is the abnormal return for either the two-day window, (21, 0)
CAR, or the 24-month BHAR; SIZE is the market value or total assets; PCTOWN is the percentage of the deal owned by the firm; INTANG is the ratio of intangible
assets to total assets; DEMOC is the measure of democratic stability; CORRUPT is the measure of government corruption, with the highest value being the least
corrupt; INVPRO is the measure of governments attitude towards investor protection; INTCONF is the measure of political violence with the highest number being
the least violent; ETHNIC is the measure of ethnic violence with the highest number being the least violent; and COMPLTE is completed deals. The symbols *, * *,
* * *, and * * * * denote statistical significance at the 10 percent, 5 percent, 1 percent and 0. percent% levels, respectively, using a two-tailed test

0.039
2.63 * * *

20.000
(20.34)
20.000
(21.08)
0.049
(2.61) * * *
20.005
(22.19) * *
0.001
(0.20)
0.003
(2.02) * *
0.003
(1.81)
20.005
(21.80) *

(21, 0)
20.019
(21.26)

Model 2

250

Adjusted R 2
F-statistic

COMPLTE

ETHNIC

INTCONF

INVPRO

CORRUPT

DEMOC

INTANG

MKT VALUE

PCTOWN

ASSETS

AR
CONSTANT

Model 1

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problem (Studenmund, 2001). The goal is to identify how government factors impact
the joint venture. The DEMOC variable, representing democratic accountability, is
negative and significant in one model, but negative and insignificant in another model.
The hypothesis states that higher levels of democratic accountability will result in
more favorable returns to the US MNEs. Thus, the data does not support our
hypothesis concerning DEMOC.
For the announcement returns, the CORRUPT variable also has mixed signs,
positive but insignificant in Model 1, but negative and significant in Model 2. Since the
higher point values reflect lower levels of corruptions, the results are quite puzzling.
The most common form of corruption is in the form of demands for special payments
and bribes; however, the ICRG measure also focuses on items such as excessive
patronage, nepotism, and close ties between business and politics. Perhaps with the
second focus, projects are more likely to be implanted successfully for at least a few
years. Wei (2000b) suggests that corruption may replace bureaucracy and red tape, so
this is another possible explanation.
The INVPRO variable, representing the governments investment profile is positive,
and significant in Model 1. The sign of the coefficient agrees with what the hypothesis
predicted: government policies that support investment create value. The INTCONF
variable, representing government stability, is positive and significant, as predicted.
Countries with low levels of armed or civil opposition are more likely to have
successful joint ventures. The ETHNIC variable, measuring the degree of tension
attributable to racial, nationality, or language divisions is negative and significant in
both of the short run models. This result is puzzling, and no explanation is immediately
apparent.
5.6 Variation in long-run valuation effects
The results of the multivariate regression on the long-run abnormal returns are also
displayed in Table VI. For all but the last model, only completed joint ventures are
used. For one model, total assets, SIZE, is positive and significant at the 10 percent
level. This appears to be saying that larger firms can benefit more from the IJV in the
long run. Both of the other firm specific variables are insignificant in all the models.
Thus the outcome of the international joint venture appears to be more dependent on
country characteristics than firm variables.
Several of the variables of interest related to government characteristics are
significant, and again, VIFs indicate that multicollinearity is not a problem. The
DEMOC variable, representing democratic accountability is positive and significant.
This is contrary to results in one of the short-run models but supports the original
hypothesis. Long-run returns are positively impacted by the governments adherence
to democratic ideals. Ultimately, the choice by the government to act in the best interest
of its people adds value.
The CORRUPT variable is both negative and significant. In the short run, while one
model had the same sign, the coefficient was relatively small and significant at only the
10 percent level. In the long run, the coefficients are ten times larger and significant, in
one model, at the 1 percent level. It appears that the ability to pay bribes, accept
nepotism and engage in favors for favors makes success more likely. There is some
literature to support the positive effect of corruption on returns. Robertson and Watson
(2004) find that higher rates of FDI correspond to higher levels of corruption. In a study

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251

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252

of telecommunication projects in emerging economies, Uhlenbruck et al. (2006) find

that high levels of corruption become institutionalized and therefore result in
non-equity modes of entry. It may well be that higher levels of corruption result in
lower levels of uncertainty and hence higher returns.
Both INVPRO, investment profile, and ETHNIC, ethnic tensions, have the opposite
sign from that predicted, but both are insignificant. The final government variable,
INTCONF, i.e. internal conflict, is positive as predicted and highly significant. Both
Alesina and Perotti (1993) and Fielding (2004) find a strong link between the conflict
and capital flight. The subcategories for this variable are civil war, terrorism, and civil
disorder. Given the extreme consequences of any of these events, the size and
significance of this variable should be expected.
The last model includes all of the original joint ventures with one added variable, a
dummy variable for completed. In this case, DEMOC and INTCONF are still positive
and significant. However, now the CORRUPT variable is no longer significant and the
COMPLTE variable is positive and significant. This corresponds to our univariate
analysis that shows completed IJVs, while negative, are higher than the announced
deals that are not completed.
5.7 Changes in risk profile
One benefit of international diversification is risk reduction. We examine whether joint
ventures with governments contribute to risk reduction benefits, and whether the
change in risk surrounding joint ventures over the first year post-JV is a function of the
political risk faced by firms engaging in joint ventures. The results of this analysis are
shown in Tables VII and VIII.
Table VII shows the change in systematic risk for the total sample and subsamples
for government control and completion status. For the total sample, no significant shift
in systematic or total risk is observed. Systematic risk increases significantly for joint
ventures where government control is retained, and decreases significantly for
completed joint ventures. Table VIII provides tests of differences in changes in risk
profile across high versus low political risk subgroups. When democratic environment
is high, firms engaging in joint ventures with governments experience a significant
decline in systematic risk. When corruption is low, there is a significant increase in the

Total sample
Government control
Not government control

Table VII.
Changes in risk

1,289
60
1,229

Completed

947

Not completed

342

Change in total risk

Change in systematic risk

0.002
(1.26)
0.001
(0.22)
0.002
(0.63)
0.005
(0.38)
0.001
(0.48)

20.015
(21.08)
0.088
(2.57) * *
20.014
(20.70)
20.022
(22.04) * *
0.002
(1.06)

Note: This table provides the difference in total and systematic risk across groups by transaction
characteristics and level of political risk over the first year following the JV

Investprf
Inter conflict
Corrupt
Ethnic

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Democratic

Difference in change in total risk

Difference in change in systematic risk

0.001
(1.13)
0.101
(0.44)
0.170
(1.89) *
2 0.220
(2 1.47)
2 0.418
(2 1.66) *

0.014
(0.40)
0.012
(0.75)
0.094
(2.04) * *
20.003
(20.27)
20.330
(21.88) *

systematic risk of sample over the first year for firms post-JV. This is perhaps the most
startling result: higher levels of corruption result in higher returns plus lower risk.
6. Conclusion
This paper has examined joint ventures between US MNEs and foreign governments.
The purpose of the paper was to identify whether the joint venture created a positive
wealth effect for the US MNE, and if so what characteristics created variation in that
effect. We examine deals specifically with government entities this makes our paper
distinct from any other paper on joint ventures or acquisitions. Most studies examine
the impact of political risk on the shareholders of firms acquiring or conducting
transactions with private sector entities in foreign countries, so the relationship
between political risk and the risk of the operating (business) environment itself is not
explicit. By examining joint venture transactions (a trust-based mode of expansion that
is heavily reliant on political risk) only with governments (as opposed to other types of
claimants and/or monitors), we are able to conduct a direct test of the impact of the
various facets of political risk (as opposed to credit risk of the private sector entity, the
role of the owners of the private sector firm, a possible board of directors or
blockholders who may have personal interests in the transactions the firms they
monitor or own shares in engage in, and so forth). This is meaningful not only to
academics, but to managers as well, who often are forced to transact with foreign
governments whether they want to or not (for instance, foreign entities are required to
partner with a local government in many countries).
The impact of various types of political risk is not unilateral across short- versus
long-run impacts on market value. We are able to document which types of political
risk matter when it comes to the shareholders of firms engaging in joint ventures in
terms of the shareholders perceptions and the actual market value of the firm. This is a
contribution to the literature in and of itself. In addition to the initial contribution, we
now examine whether the forms of political risk we examine increase or decrease
systematic risk to shareholders of sample firms.
The results presented here show that a small, but significant positive abnormal
return is present upon the announcement of the joint venture, but in the long run,
significant negative returns occur. Some variation in the origin of these positive returns
existed. In particular, incomplete joint ventures resulted in no significant abnormal

Joint ventures:
MNCs and
governments
253
Table VIII.
Changes in risk by level
of political risk

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254

return, indicating the market only places value on joint ventures that are taken to
fruition, and that the market gleans the outcome at the beginning of the process.
Significantly, the market places a higher value on joint ventures in which the
controlling interest was not in the hands of the foreign government.
A regression on firm and government characteristics indicates which factors
contribute to the positive wealth creation. When examining the short-run returns, US
MNEs with higher intangible assets have higher announcement returns. In the short run,
the results for the foreign government factors were initially puzzling. Less ethnic tension
and less corruption both resulted in lower returns. On the other hand, the expected
results for a favorable view of the government on investment and less internal conflict
resulted with both being significant in at least some of the announcement return models.
The results for the democracy variable depended on the model specification, in particular
on how size was measured, and so its results are less reliable.
When examining the long-run returns, contrary to the short-run results, overall the
returns were large, negative and significant. While the announcement returns are less
than 0.4 percent in all the windows, the long run BHARs are almost ten times that with
2 3.99 percent for the 12-month window. What is even more surprising is that firms
with uncompleted IJVs perform even worse, with returns of 2 12.66 percent for the
24-month window. For the long-run returns, a reduction in internal conflict and an
improvement in democracy are both favorable across all the models. Another clear
result was that an increase in corruption favorably affects long-run returns. In
addition, results from our analysis of post-transaction risk shifts indicate that the
higher returns occur with lower systematic risk encountered by shareholders of firms
engaging in transactions with higher political risk governments.
Previous research has shown that international joint ventures create wealth in the
short run. This study adds to those results by examining joint ventures with foreign
governments and we find that the short run returns are positive and significant. This
study also examines the long run impact and observes a negative return. This result
has been found in previous studies (Gleason et al., 2005), but the fact that uncompleted
deals are even more negative is something that should be investigated in future
research.
Finally, we are able to provide information to managers regarding the impact of
joint ventures with governments on the risk of firms engaging in these joint ventures.
We find that, overall, these transactions do not yield a significant shift in total or
systematic risk. However, systematic risk increases significantly for firms in joint
venture transactions where governments retain control and lowers systematic risk
when democratic institutions are high. Joint ventures with governments in countries
with less corruption appear to result in a statistically significant increase in systematic
risk. Hence, managers who engage in joint ventures seeking risk reduction benefits
should take specific political risk factors into account.

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Appendix

Table AI.
Political risk group
factors mean and
median scores by
variable

Table AII.
Correlation coefficients

Investprf
Inter Conflict
Corrupt
Ethnic
Democratic

Investprf
Interconflct
Corrupt
Ethnic
Democratic

Mean

Median

Q1

Q4

6.42
10.12
3.68
4.18
3.54

6.25
10.71
4.00
4.42
2.50

5.28
9.00
3.00
3.17
2.50

7.50
11.50
4.90
5.00
5.00

Investprf

Interconflct

Corrupt

Ethnic

Democratic

1.000
0.151 * *
20.063 * *
0.214 * *
0.113 * *

0.151 * *
1.000
0.380 * *
0.530 * *
0.231 * *

2 0.063 * *
0.380 * *
1.000
0.239 * *
0.466 * *

0.214 * *
0.530 * *
0.239 * *
1.000
0.182 * *

0.113 * *
0.231 * *
0.466 * *
0.182 * *
1.000

Corresponding author
Joan Wiggenhorn can be contacted at: jwiggenhorn@fit.edu

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