Social capital and human resource management in international joint ventures in vietnam a perspective from a transitional economy

Social capital and human resource management in international joint ventures in Vietnam: a perspective from a transitional economy C.. Neuperta, Phan Thi Thuc Anhband Ngo Thi Minh Hangb

Social capital and human resource management in international joint ventures in Vietnam: a perspective from a transitional economy

C Christopher Baughna*, Kent E Neuperta, Phan Thi Thuc Anhband Ngo Thi Minh Hangb

a

Department of Management, College of Business and Economics, Boise State University, Boise, ID, USA; b NEU Business School, National Economics University, Hanoi, Vietnam

This study highlights the importance of social capital in international joint ventures (IJVs), and examines human resource practices as a factor shaping such social capital Comprehensive measures of social capital are developed and tested, which extend prior work on ‘bonding’ and ‘bridging’ social capital We also link social capital with its anticipated antecedents and consequences The study’s findings are based on data collected from 164 IJVs located in Vietnam IJV performance was predicted by training and by the level of trust and cooperation between foreign and local personnel Training (including acquisition of management skills, technology, and cross-cultural under-standing) also was predictive of the measures of social capital A key practical implication arising from this study is that the return on investment from training of joint venture personnel can stem not only from the transfer of technical and management skills needed for developing competitive advantage, but also from the positive impact

on social capital, which further contributes to venture success The establishment of written objectives and plans for the venture, as well as the IJV’s level of control regarding its own HR functions also was found to be related to some components of social capital The findings of this study reinforce the call to build on the contributions

of local personnel in joint ventures, and in Vietnam in particular

Keywords: alliance management; human resource management; international joint ventures; social capital; Vietnam

While international joint ventures (IJVs) are an increasingly important way for organizations to expand internationally, many difficulties arise in achieving effective collaboration (Kogut 1988; Fryxell, Dooley and Vryza 2002; Chan, Luk and Wang 2005; Madhok 2006; Zhan, Chen, Erramilli and Nguyen 2009) In achieving a good ‘fit’, differences in strategies, culture, and capabilities need to be addressed Decision making and control mechanisms conducive to good communication and effective monitoring of the collaboration need to be developed (Cui, Ball and Coyne 2002) Developing effective human resource policies and practices plays an important role in this process, and is critical for IJV’s success (Pucik 1988; Zeira and Parker 1995; Schuler 2001; Kabst 2004) Human resource management (HRM) functions must address control, trust, and conflict issues, establishing mechanisms to enhance trust and performance (Iles and Yolles 2002; Inkpen and Currall 2004; Lu and He´bert 2005) IJV research has repeatedly emphasized the importance of developing social capital, especially trust (Buckley and Casson 1988; Yan and Gray 1994; Currall and Inkpen 2002; Madhok 2006; Zaheer and Zaheer 2006)

ISSN 0958-5192 print/ISSN 1466-4399 online

q 2011 Taylor & Francis

DOI: 10.1080/09585192.2011.556776

*Corresponding author Email: cbaughn@boisetstate.edu

Vol 22, No 5, March 2011, 1017–1035

This work examines the role of HRM functions in the development of social capital in IJVs We examine this issue from the perspective of IJVs in a transitional economy, Vietnam

As noted by Jarillo (1988), IJVs potentially enable parent companies to blend their competencies into a stronger organization than if either parent acted independently Success in this collaborative process entails developing a process wherein the critical objectives of the partners are met This may require the development of compatible objectives (strategic fit), shared business logic and mutual understanding (cultural fit), a willingness to share competencies and other critical resources (capabilities fit), and decision making and control mechanisms which facilitate communication and effective monitoring (organizational fit) (Cui et al 2002)

Observers of IJVs have noted the importance of control mechanisms in developing predictability and the confidence that the other partner will behave in a way that is consistent with mutual benefits (Beamish 1988; Geringer and Hebert 1989; Sohn 1994; Das and Teng 1998) Many observers have noted the distinction between formal controls (often related to majority ownership) and social control mechanisms Formal control relies on hierarchy, planning, and reporting mechanisms with prespecified behaviors or performance outcomes On the other hand, social control entails the development

of social relations and shared norms and values (Beamish and Banks 1987; Madhok 1995; Fryxell et al 2002) Social controls, once established, were argued to be better suited to building partner cooperation in IJVs, reducing monitoring and contracting costs, and enhancing the flexibility and adaptability critical to long-term performance (Dryer 1997)

In the context of the inherently unstable IJV relationship, management processes creating trust and the ongoing capacity to collaborate are necessary (Johnson, Cullen, Sakano and Takenouchi 1996; Neupert and Beamish 2001) Social cohesion, communication, and the development of a win – win culture need to be established (Child and Faulkner 1998; Schuler 2001) The relationships that make organizations work effectively constitute social capital Social capital consists of the trust, close relationships, respect, and mutual understanding developed in the structure and content of social relations, leading to goodwill and solidarity (Fukuyama 1995; Kale, Singh and Perlmutter 2000; Adler and Kwon 2002) This is associated with a common sense of purpose and strong norms of cooperation (Prusak and Cohen 2001)

Trust has been an especially important issue in IJV research (Buckley and Casson 1988; Yan and Gray 1994; Gill and Butler 1996; Currall and Inkpen 2002) Currall and Inkpen (2002) defined trust as reliance on another partner under a condition of risk Trust may strengthen interorganizational ties, speed contract negation, and reduce transaction costs (Neupert and Beamish 2001; Schuler 2001)

Determinants of social capital in IJVs

Although social capital can be seen as important in the functioning of any organization, it

is easy to see why it has been emphasized in the IJV literature The creation of a firm from two or more geographically separated parents itself gives rise to loyalty issues, potential for disagreement and battles for control Based on the literature, this study posits a number

of factors that are likely to shape the development of social capital in IJVs These factors include initial work-related commonalties between the partners, cultural differences, the development of formal written objectives plans, training, and the joint venture’s control of its own human resources functions

Operational relatedness

To the extent that the partners share similar backgrounds and experience on dimensions relevant to the success of the business, there may be a greater affinity and higher levels of trust between the firms Geringer (1988) cautioned managers regarding partnerships with dissimilar companies Differences in size, organizational culture, policies, and manage-ment styles can undermine the partnership (Bucklin and Sengupta 1993) Johnson et al (1996), on the other hand, found that neither similarity nor complementarity had major effects on trust in cooperative alliances This study will reexamine this issue in a different country context Our position is that initial differences in such work-related areas as products, customers, and skill base could be a source of conflict, and that operational relatedness could serve as a common foundation for building social capital

H1: Social capital is positively related to the prior operational relatedness of the firms participating in the joint venture

Cultural differences

One would expect that a dissimilarity of cultural values would complicate the formation of social capital Cultural differences may effect evaluation of strategic choices (Gomes-Casseres 1989), and would be expected to lead to differences in expectations regarding company operations, structure, and policies Fryxell et al (2002) found that cultural distance was negatively correlated with measures of trust in IJVs based in the US IJV conflict regarding staffing issues was noted in China, where overstaffing is common among state enterprises Values of productivity vs the provision of employment, as well as conflict regarding dismissal policies, pay, and promotion, were noted (Tsang 1994) Therefore, we propose the following hypothesis:

H2: Social capital is negatively related to the cultural differences between firms participating in the joint venture

Formal objectives and plans

To the extent that shared ownership in the IJV constitutes a dual hierarchy, there is a high potential for conflict (Harrigan 1986; Madhok 1995) Such conflicts are often cited as a cause for IJV failure (Tsang 1995; Fedor and Werther 1996; Lu 2006)

As noted by Nahapiet and Ghoshal (1998), social capital includes a cognitive component – shared interpretations and representations – as well as structural and relational attributes The development and articulation of clear goals and plans for the venture can facilitate a clear, common understanding about such purpose and the means by which it is to be attained (Neupert and Beamish 2001; Thuy and Quang 2005) The need to bridge potentially differing company objectives, operational differences, and differences

in cultural understanding may amplify the need for formal goals and plans in developing social capital (Inkpen and Currall 2004)

H3: Social capital is positively related to the utilization of formal objectives and plans for the venture

Training

Training may have an impact on social capital While Youndt and Snell (2004) found that developmental HR practices were not significantly predictive of social capital in a sample

of US firms, there is reason to believe that the impact of training in IJVs (especially in developing economies) will be more pervasive Training relating to operational issues such as technology and managerial skills may facilitate a greater potential for shared involvement between foreign and local employees in venture activities, and provide a better foundation for enhanced mutual understanding Mutual understanding may also be enhanced through cross-cultural training Geringer and Frayne (1990) suggested that language and cultural training can improve the extent and quality of communication within the IJV as well as between the venture and its parents

H4: The higher the level of training provided to IJV employees, the higher the social capital

Control of the human resources function

Many conflicts in IJVs are related to human resource issues Employees in different countries may have very different expectations about what companies should do in terms

of recruitment, selection, compensation, appraisal, promotion policies, vacations, flexible work hours, or general working conditions (Shenkar and Zeira 1987; Gamble 2000; Iles and Yolles 2002) In an IJV, two or more sets of HR practices interact As noted by Pucik (1988), this can lead to tension between the desire to comply with local HR practices (regarding staffing and labor relations, for instance) and the desire of the partners to retain parent-country practices for reason of familiarity and/or control

Indeed, HR practices constitute a significant source of control in the IJV (Geringer and Frayne 1990) Several researchers have noted that ownership distribution in the IJV may matter less than the right to appoint key personnel to the venture For a parent with minority ownership, control can be achieved by appointing managers loyal to the parent company (Killing 1983; Schaan 1983; Pucik 1988) Of course, evaluation and compensation practices can also be seen as control mechanisms (Harrigan 1986; Geringer and Frayne 1990)

This leads to the issue of how much control of HR functions should be retained by the IJV parents, and how much should be apportioned to the IJV itself As noted by Gifford (1998, p 11), this can be seen as one manifestation of the larger issue of control and IJV autonomy:

As their joint ventures continue to spring up in increasingly remote parts of the world, multinational companies are having to revisit a well-known management dilemma: Which tasks should be performed at headquarters and which should be delegated to on-site managers?

Many researchers on IJVs have argued for a high level of IJV autonomy in regards to human resource functions Harrigan (1987) noted that parent firm managers tended

to overmanage their subsidiaries, especially if they were unfamiliar with techniques for managing cooperation Parent company managers may not understand local differences in

HR practices and expectations, and instead attempt to inappropriately apply uniform, worldwide corporate policies Because of the importance of developing human resource policies and practices consistent with the host culture, delegating authority to local managers might be more beneficial (Zeira and Parker 1995; Schuler 2001) Such local control may be particularly important in developing countries, where there are substantial differences between host country conditions and the parent company environment (Gifford 1998)

The initial level of control accorded to the joint venture itself may lead to the development of policies and practices more likely to effectively align the venture with its

host environment, leading to higher levels of social capital Of course, the level of HR control held by the joint venture may change over time, and may lead to further development (or reduction) of social capital

Lorange (1986) has argued that the IJVs should have their own, strong, fully fledged

HR department HR input to the partnership is critical in staffing and motivating people, as well as in establishing mechanisms to enhance trust and the relationship between alliance partners (Pucik 1988; Iles and Yolles 2002) Therefore,

H5: Social capital is positively related to IJV control (rather than parent control) of its

HR functions

IJV performance

As noted above, establishing a shared vision, enhanced communication, and resolution of conflict are key challenges for joint venture success Building social capital involves the development of a teamwork culture To the extent that the psychic distance between employees from different companies and countries is reduced and identification with the IJV itself is established, key impediments to IJV success are removed Furthermore, we have noted that the development of social capital can provide an alternative to hierarchical, rule-based control mechanisms Firms characterized by higher levels of social capital may, therefore, be afforded more flexibility and adaptability Therefore, H6: Social capital is predicative of IJV performance

Investments in training can be anticipated to lead to higher levels of IJV performance Training may be particularly critical for the success of joint ventures in developing countries Firms in developing countries may have greater needs for technical support and adaptation (Contractor 1980), and the success of the IJV itself may depend on the ability

of host-country employees to absorb the technology, production techniques, and managerial skills needed to convey competitive advantage Training has been argued to

be a particularly crucial issue for the management of foreign firms in Vietnam Though the Vietnamese labor force is young and generally well educated, it is also characterized

by lack of skill and experience, as well as a dearth of managers trained in free market principles of management (Mai, Bilbard and Som 2009) This leads to the final hypothesis

H7: The level of training provided to IJV personnel is predicative of performance

An overview of our proposed model is presented in Figure 1

Research site

Vietnam provides a very desirable site for examining the development of social capital in

IJVs Since Vietnam’s large-scale economic reform (known as Doi Moi) began in 1986,

thousands of foreign-invested enterprises from approximately 70 nations were formed in the country These investments, including over 1000 IJVs, constitute a significant portion

of the nation’s GDP Ministry of Planning and Investment (MPI 2005; Vu 2005) Although such ventures contribute substantially to Vietnam’s economy, they also represent opportunities for foreign-based MNCs The country, only recently seen as an important player in the international market, is characterized by a solid record of economic growth, a stable social – political environment, rich national resources, and an ambitious, young, hard-working labor force (JICA 2003; MPI 2005) These factors make Vietnam a

very attractive destination for foreign firms to conduct business and make an investment (Mai et al 2009)

These opportunities are countered, however, by the difficulties faced by foreign managers in working effectively in transitional economies such as Vietnam Such difficulties may include issues in the IJV’s environment (legal, bureaucratic, and regulatory uncertainties) and within the venture itself, including lack of management skills, cultural differences, and differing objectives (Neupert, Baughn and Dao 2005) Developing social capital in this setting may be particularly critical, because (1) in Vietnam and other economies characterized by poorly defined property rights and legal systems, firms many need to rely on trust-based transactions, which substitute for effective market transactions (Nguyen 2005; Nguyen and Rose 2009), and (2) Vietnam is

a high context culture with a strong relationship-based orientation (Thuy and Quang 2005)

A further complexity facing those responsible for IJVs in Vietnam involves working

in the context of dual ideologies (Nguyen 2005) Following the Doi Moi reforms,

Vietnam has endeavored to create a market economy under social guidance For the Vietnamese partner, socialist ideology stands with market ideology, whereas most of the IJVs are with firms from market economies This places additional demands on the development of shared understanding Social capital entails overlapping or shared understanding, and effective HRM practices can help in providing a shared frame of reference (Taylor 2007) This study examines the use of HRM practices in a complex environment like Vietnam, and the relationship of such practices to social capital and IJV performance

Operational

Relatedness

Cultural

Differences

Formal

Objectives

JV Control of

HR

Training:

- Operations

- Cultural

Social Capital

IJV Performance

+

+

+

+ –

Figure 1 Operational model: hypothesized predictors of social capital and IJV performance

Sample

The sample for this study was drawn from a population of IJVs provided in a listing by the MPI, the government authority managing all Foreign Direct Investment (FDI) activities in Vietnam The study focused on Ho Chi Minh City and Hanoi, the two biggest economic centers of the country, where most IJVs are located The sample was drawn from a list of all IJVs in both locations The companies selected had been in operation for 3 years

or more to establish a foundation for the development of social capital and a track record of IJV’s performance

Data collection was conducted using a questionnaire survey developed for the purposes

of this study The majority of respondents were directors or vice directors of the IJVs, who are responsible for the company’s overall performance and for the success of the venture Others were mainly department heads who responded to the survey according to the assignments of their superiors If the contacted person agreed to participate in the survey, the field researcher delivered the questionnaire directly to him/her

Personal delivery of the questionnaires was used to help ensure a high response rate Given Vietnam’s high-relationship culture, we were concerned that the use of post mail or e-mail would yield an unacceptably low response rate Sharing information with outsiders through responding to surveys is still not common among Vietnamese companies (see Zhan et al 2009)

For most appointments, the respondents completed the questionnaire while the researcher waited In other cases, the researchers left the questionnaires at the survey subjects’ offices and came back to collect them at another time

In total, 260 appointments were made, 218 of which resulted in completed questionnaires (158 in Ho Chi Minh City and 60 in Hanoi) Of the 218 responses, 181 firms were represented by a Vietnamese respondent In 37 firms, foreign respondents presented their perceptions of the joint venture For this study, only the Vietnamese responses were used Seventeen surveys were eliminated due to missing data, yielding a final sample size

of 164

In terms of foreign partners’ country of origin, 26 of the foreign partners were headquartered in Japan Twenty-three were from Singapore, 20 from South Korea, 18 from Taiwan, 12 from Hong Kong, and 13 from other Asian countries Twelve of the alliance partners were headquartered in France and 14 in other European countries Eight were from Australia and seven from the US The remaining 11 alliances involved partners from other countries or with multiple partners from more than one foreign region The high proportion of Asian joint ventures reflects the pattern of FDI in Vietnam Of course, this must be taken into consideration when interpreting the results The interviewed IJVs had been in operation from 3 to 14 years, with an average of 7.6 years In most IJVs, foreign partners held a substantially larger share of equity than the Vietnamese counterparts (the average level of equity held by the Vietnamese partner was 36%)

Variables and measures

The first version of the questionnaire was developed in English The questionnaire was then translated into Vietnamese by two of the authors and back-translated to English by a separate translator Some differences in wording between the original version and the back-translated version led to minor revisions, followed by pretesting and preliminary item analysis before final revisions and administration in the joint ventures

Most variables were measured by multiple items using a Likert-type (1 ¼ strongly disagree to 5 ¼ strongly agree) format All of the items in the scales, as well as the source

of the items and scale reliabilities, are found in Appendix A

Measures included a scale assessing the operational relatedness of the venture with the

foreign parent’s technology, products, industry, customers, and skill base (see Lyles and Salk 1996) An item on this scale, e.g is ‘Our products were highly related to that of the

partner(s).’ The measure of cultural differences used a four-item scale adapted from

Simonin’s (1999) study of international strategic alliances An item from this scale is ‘Our

national culture is very different from the partner’s.’ The use of written objectives and

business plans was taken from Lyles and Salk (1996) One of the items reads, ‘The venture has very detailed written business objectives.’ Items assessing investment in training – for example, ‘every year the venture commits significant resources to educating and training

Vietnamese personnel to master the technology brought by the foreign partners’ – were

taken from Cao (2000) This measure of training contains two items dealing with operational issues (training regarding technology and management skills), and an item dealing with cross-cultural training Because it is instructive to assess the impact of the

typeof training provided, subscales (operational and cultural training) were included with the overall training measure in the analyses

Control of the human resources functionwas assessed by asking respondents to report the proportion of control allocated to the foreign parent, the Vietnamese parent, and the joint venture itself for each of the five following HR functions: staffing of operational personnel, staffing of executive personnel, training and development, employee evaluation, and employee compensation These allocations were gathered with regard to both the levels of control at the initial founding of the IJV as well as for the current level of control allocated to the parents and the joint venture This study’s hypotheses deal with the level of control allocated to the IJV itself, both with the level of control allocated to the venture at the foundation of the IJV, and with the extent to which HR control changed over the course of the venture To calculate the change variable, each venture’s initial level of

HR control was subtracted from its current level As typical with change scores, the measure of change is significantly correlated with the initial level of control Therefore, the interpretation of the change measure should be through the significance of its coefficient when controlling for the level of initial control, as in the regression analyses to

be presented

Items measuring social capital were developed for this study The items were subjected

to factor (principal components) analysis, using varimax rotation, and applying the standard cut-off point for eigenvalues greater than 1.0 The analysis of the social capital items yielded three factors, accounting for 65.3% of the total variance Each item demonstrated factor loadings greater than 0.50, demonstrating that each original item is highly correlated with its factor Three scales were, therefore, derived from this analysis, calculated by the mean for the original loaded items One resulting scale measures

connections – the level of interpersonal interaction between Vietnamese and foreign partner personnel An item on this scale is, ‘Vietnamese personnel in the venture frequently interact with the foreign partner’s personnel in Vietnam through work related

activities’ The second scale, participation, examined the collaborative sharing of

activities and decision making between the partners For example, ‘overall, Vietnamese personnel have been deeply involved in shared activities between partners.’ The third scale

incorporated items assessing levels of trust and cooperation between the partners Items

from this scale include, ‘the partner is trusted,’ and ‘the partner is very cooperative with us

in solving problems.’

Joint venture performance was assessed using a four-item scale developed by Lyles and Salk (1996) One item, e.g is ‘the venture achieved its target sales volume.’ Respondents were asked to rate venture performance both for the prior year and for the

prior three years Control variables included (1) JV age, calculated as the number of years

in operation up to the time the respondents were interviewed and (2) the proportion of equity in the venture held by the Vietnamese parent

As seen in Appendix A, reliability analyses for the scales measured by multiple items appeared satisfactory Furthermore, all items were entered in an overall factor analysis (principal components and varimax rotation) This resulted in 13 factors with eigenvalues greater than 1, accounting for 74.3% of the total variance The identification of several distinct factors, coupled with the finding that the first factor only accounted for 12.2% of the total variance, attenuates concerns about common method variance (Podsakoff and Organ 1986)

Results

Correlation analyses

Table 1 presents the means, standard deviations, and correlations among the variables in this study Examining of the mean of the variable measuring change in human resources control (a positive value of 17.12), one can see that IJV control of its HR functions increased over the duration of the ventures

Ancillary analyses revealed that IJV control increased for each of the five HR functions (staffing of operational personnel, staffing of managerial personnel, training and development, employee evaluation practices, and employee compensation practices) measured here The increase in IJV control was greatest in regards to management staffing The three measures of social capital were found to be significantly related to each

other, with intercorrelations ranging from r ¼ 0.35 ( p , 0.01) for the relationship between connections and participation, to 0.60 ( p , 0.01) for the trust–cooperation and participationrelationship

There was a slight tendency for the ventures to provide more cross-cultural training in

the face of cultural differences (r ¼ 0.16, p , 0.05) Cross-cultural training was more

likely to occur in ventures that had established clear written objectives and plans

(r ¼ 0.36, p , 0.01) Both operational and cross-cultural training were more likely to be

provided in those ventures that were operationally related (similar in products, technology, for example) to the foreign parent Joint venture performance was found to be significantly correlated with training as well as with each of the overall measures of social capital

Regression analyses

The ability of the independent variables in this study to contribute unique prediction of the measures of social capital was assessed through multiple regression analyses

Prediction of social capital

The analyses presented in Table 2 address the extent to which the hypothesized context conditions (operational relatedness and cultural differences) and organizational practices (establishment of written objectives, training, and control provided to the venture over its

HR functions) are related to the three measures of social capital For each of the social capital measures, two regression analyses were performed – first with the measure of

Table 1 Relationships among variables.

1 Operational relatedness 3.50 0.78

2 Cultural differences 3.22 0.73 0.07

5 Training: operations 3.43 0.94 0.33** 0.13 0.17* 0.95**

6 Training: cultural 3.48 0.88 0.25** 0.16* 0.36** 0.73** 0.47**

7 Initial HR control: JVa 67.36 30.09 0.16* 20.01 20.01 0.12 0.11 0.11

8 Change in HR Control: JVa 17.12 25.10 20.21** 20.06 20.07 0.02 0.02 0.02 20.56**

9 Participation 3.81 0.60 0.21** 0.11 0.32** 0.41** 0.35** 0.40** 0.20* 20.06

10 Connections 3.33 0.58 0.16* 0.05 0.19* 0.41** 0.34** 0.42** 0.09 20.01 0.35**

11 Trust/cooperation 3.72 0.62 0.25** 0.04 0.30** 0.44** 0.40** 0.36** 0.15* 20.04 0.60** 0.43**

12 JV performance (1 year) 3.59 0.89 0.15 0.08 0.06 0.33** 0.36** 0.14* 0.00 0.09 0.28** 0.18* 0.39**

13 JV performance (3 years) 3.68 0.81 0.13 0.03 0.11 0.33** 0.35** 0.16* 0.01 0.04 0.25** 0.20* 0.31** 0.75**

14 JV age 7.62 2.73 20.13 0.04 20.04 2 0.08 2 0.11 0.01 20.10 0.22** 20.05 2 0.05 2 0.03 0.07 2 0.04

15 Equity split (local)a 36.83 11.80 0.00 2 0.02 20.07 2 0.07 2 0.07 2 0.05 0.05 20.07 0.07 2 0.20** 2 0.05 0.01 2 0.02 0.04

Notes: a Variable transformed to correct for skewness Means and standard deviations for original variable.

n ¼ 164; *p , 0.05 and **p , 0.01.