Contextual Distance and Alliance Performance

Cultural distance and other forms of contextual distance would certainly be expected to dampen an alliance's performance through creating misunderstandings and conflicts (Barkema & Vermeulen, Reference Barkema and Vermeulen1997; Hennart & Zeng, Reference Hennart and Zeng2002, Parkhe, Reference Parkhe1991). A meta-analysis by Reus and Rottig has shown that this is so (Reus & Rottig, Reference Reus and Rottig2009). Contextual distance may also impair alliance performance by setting up barriers to the knowledge exchange (De Long & Fahey, Reference De Long and Fahey2000; Fang & Zou, Reference Fang and Zou2010) that is necessary for organizational learning (Aguilera, Reference Aguilera2007; Argote & Ingram, Reference Argote and Ingram2000) and knowledge creation (Nahapiet & Ghoshal, Reference Nahapiet and Ghoshal1998). So that, too, should dampen alliance performance. In addition, diversity in terms of culture, institutions, and economic system may lead to partners having diverse knowledge bases (Hambrick, Li, Xin, & Tsui, Reference Hambrick, Li, Xin and Tsui2001; Shin, Kim, Lee, & Bian, Reference Shin, Kim, Lee and Bian2012), and this can have an inverted U-shaped relationship with knowledge creation and, thus, alliance performance (Dahlin, Weingart, & Hinds, Reference Dahlin, Weingart and Hinds2005; Katila, Reference Katila2002). In sum, combining these three possible mechanisms, we propose:

Contextual Distance and Knowledge Diversity

Contextual distance comprises cultural, institutional, and economic elements, where the cultural distance between countries refers to differences in management practices, values, mindsets, and norms of behavior (Hofstede, Reference Hofstede1984, Reference Hofstede2001; Kogut & Singh, Reference Kogut and Singh1988). Any or all of these distance dimensions might potentially generate learning opportunities (Park & Ungson, Reference Park and Ungson1997; Parkhe, Reference Parkhe1991). Nationality has a particular influence on values, mental models, demeanor, language, and so on (Hambrick, Davison, Snell, & Snow, Reference Hambrick, Davison, Snell and Snow1998; Roberts & Boyacigiller, Reference Roberts, Boyacigiller, Cummings and Staw1984), so the nationalities of an alliance's managers could be an important source of cognitive diversity (Hambrick et al., Reference Hambrick, Li, Xin and Tsui2001), ‘. . .[providing] team members with a wide range of ideas, perspectives, knowledge, and values’ (Shin et al., Reference Shin, Kim, Lee and Bian2012: 199). Empirical work has confirmed that variety in national culture increases knowledge and skill diversity (Shachaf, Reference Shachaf2008).

Institutional distance describes the extent of dissimilarity in the regulatory, cognitive, and normative institutions of alliance partners’ home countries (Kostova, Reference Kostova1996; Xu & Shenkar, Reference Xu and Shenkar2002). When such institutional distance is great, as between China and western countries, for example (Ahlstrom, Young, Nair, & Law, Reference Ahlstrom, Young, Nair. and Law2003), the partners in an alliance must deal with different regulations and norms of business practice (Eden & Miller, Reference Eden and Miller2004) beyond the ‘. . .different cognitive structures and social knowledge shared by the people in a given country’ (Kostova, Reference Kostova1997: 180). If they can do so, institutional distance could bring diverse knowledge to an alliance.

Economic distance describes differences in the level of economic development between the partners’ home countries. It involves differences in factor costs (such as natural resources, financial resources, and human resources), in infrastructure development, and in technological capabilities (Ghemawat, Reference Ghemawat2001; Tsang & Yip, Reference Tsang and Yip2007). Firms from developed and less developed countries normally rely on different information sources and have different ways of doing business. Thus, the greater the economic distance between alliance partners, the more diverse the alliance's knowledge base will tend to be. Taken together, we propose:

Contextual Distance and Knowledge Exchange

Knowledge exchange in an alliance context refers primarily to the exchange of operational methods, know-how, and feedback regarding products and procedures between the partners (Cummings, Reference Cummings2003). Cultural distance usually impedes such exchanges because of different norms of behavior (Lin & Germain, Reference Lin and Germain1998; Luo & Park, Reference Luo and Park2004). Specifically, in a survey conducted by De Long and Fahey (Reference De Long and Fahey2000), managers in multicultural joint ventures (actually, equity-based international alliances) frequently mentioned problems arising from poor communication owing to cultural barriers. Poor communication impedes knowledge sharing and exchange (Fang & Zou, Reference Fang and Zou2010) and can also limit intercultural understanding and lead to misunderstandings about assignments (Heiman & Nickerson, Reference Heiman and Nickerson2004; Heiman, Li, Chan, & Aceves, Reference Heiman, Li, Chan and Aceves2008; Oxley, Reference Oxley1997). In the worst case scenario, managers from one partner firm may incorrectly interpret certain actions or statements of managers from the other. Cultural distance, thus, can impede knowledge exchange.

Similarly, knowledge exchange tends to be more difficult when the institutional distance between the partners’ home markets is great. In an emerging economy such as China’s, the legal framework, particularly property rights law, contract law, corporate law, and arbitration, is relatively weak compared with the more established institutional environment in developed economies (Ahlstrom et al., Reference Ahlstrom, Young, Nair. and Law2003; Studwell, Reference Studwell2003). With concerns about intellectual property rights protection, foreign partners might be unwilling to share advanced knowledge with a local partner. In addition, local managers may have a limited understanding of global business (Braun & Warner, Reference Braun and Warner2002; Goodall, Warner, & Lang, Reference Goodall, Warner and Lang2004) and foreign managers may not be familiar with the local institutional environment and ways of doing business there (Ahlstrom et al., Reference Ahlstrom, Young, Nair. and Law2003). As a result, partners may develop different perceptions about normative obligations, expectations, goals, and appropriate means of attaining them. Such discrepancies make it difficult to communicate ideas and to cooperate.

Firms from emerging economies usually lag in their technological, management, and marketing expertise, even though they enjoy lower factor costs, particularly in wages and rent (Tsang & Yip, Reference Tsang and Yip2007). Their different expertise and knowledge, even if perceived as lower level, should be helpful to an alliance, but the knowledge gap might impede the exchange of information required to exploit the diversity. In addition, economic distance may lead to different opinions about employee compensation, which might nurture perceptions of unfairness or even conflict. This suggests a third proposition:

Knowledge Diversity and Knowledge Exchange

Individuals often tend to apply social categories to themselves and others (Tajfel & Turner, Reference Tajfel, Turner, Worchel and Austin1985). They do so based primarily on demographic characteristics, including information dimensions such as education level and expertise (Shin et al., Reference Shin, Kim, Lee and Bian2012; Wiersema & Bantel, Reference Wiersema and Bantel1993). In a strategic alliance, expertise is a primary basis of knowledge diversity, and different specializations may split alliance members into different expert camps. Members will tend to perceive those from a different expert camp as less trustworthy, less capable, and less cooperative (Brewer, Reference Brewer1979; Tajfel, Reference Tajfel1982). This perception would impede interpersonal or intergroup relations and promote communication breakdowns in the alliance (Hambrick et al., Reference Hambrick, Li, Xin and Tsui2001; Li & Hambrick, Reference Li and Hambrick2005). Knowledge exchange between the partners would be impaired.

When seeking or applying new knowledge, it helps to have a knowledge base in the same or a similar area, as similarity will facilitate understanding the intricacies of the new knowledge and how it can be best applied to the firm's unique circumstances. An alliance partner may have difficulty absorbing knowledge that is very different from what it currently knows (Cohen & Levinthal, Reference Cohen and Levinthal1990). A study by Lane and Lubatkin (Reference Lane and Lubatkin1998) found that the ability of firms to learn from one another in an alliance depends on the similarity between the partner firms’ knowledge bases, organizational structures, and dominant logics. Therefore,

Knowledge Diversity and Knowledge Creation

Knowledge is created when alliance partners integrate each other's knowledge to create new ideas, routines, and codes (Alavi & Tiwana, Reference Alavi and Tiwana2002; Fang, Reference Fang2011; Phan & Peridis, Reference Phan and Peridis2000). In this process, diversity can have contrasting effects. A moderate level of diversity should reveal opportunities for learning that will tend to emerge from the diverse perspectives, mindsets, business models, and knowledge bases newly available through the alliance. Cohen and Levinthal (Reference Cohen and Levinthal1990) have observed that ‘In addition to strengthening assimilative powers, knowledge diversity also facilitates the innovative process by enabling the individual to make novel associations and linkages’ (Cohen & Levinthal, Reference Cohen and Levinthal1990: 131). If knowledge diversity is too great, however, the partners’ different perspectives, mindsets, and business models may be so divergent that it may become impossible for the partners to maintain consensus and effectively absorb knowledge from each other (Hambrick et al., Reference Hambrick, Li, Xin and Tsui2001; Li & Hambrick, Reference Li and Hambrick2005). Prior research has confirmed that knowledge diversity can create barriers to knowledge integration (Ahuja, Reference Ahuja2000; Hinsz, Reference Hinsz1990; Johnsson, Reference Johnsson, Birkinshaw and Hagstrom2000; Walsh, Reference Walsh1995). Chi, Huang, and Lin (Reference Chi, Huang and Lin2009) found that differences in organizational tenure have an inverted U-shaped relationship with team innovation. Dahlin et al. (Reference Dahlin, Weingart and Hinds2005) found that diversity in educational background had an inverted U-shaped relationship with the range and depth of information co-workers use and that national diversity had an inverted U-shaped relationship with the depth of information they use and its integration. Katila (Reference Katila2002) found that the age variance of the external knowledge searched by a firm had an inverted U-shaped relationship with the number of new products the firm introduced. We propose:

Knowledge Exchange and Knowledge Creation

Creating new knowledge in an alliance often involves integrating different types of specific knowledge brought to it by the partners (Dussauge, Garrette, & Mitchell, Reference Dussauge, Garrette and Mitchell2000; Nahapiet & Ghoshal, Reference Nahapiet and Ghoshal1998; Rothaermel, Reference Rothaermel2001). This works best if partners are familiar with each other's knowledge base as a result of knowledge exchange and interaction. Some scholars even argue that interaction and individuals’ exposure to partner knowledge is a necessary condition for organizational learning (Aguilera, Reference Aguilera2007; Argote & Ingram, Reference Argote and Ingram2000), assuming, as some do, that knowledge creation depends on the collective ability of employees to exchange and combine knowledge (Nahapiet & Ghoshal, Reference Nahapiet and Ghoshal1998).

Knowledge Creation and Performance

Following Child and Yan (Reference Child and Yan2003), we will focus on two types of alliance performance – goal achievement and system performance. Goal achievement describes the extent to which each parent company's objectives in forming the alliance are realized. System performance is the extent to which the alliance itself performs well. Knowledge creation should promote good performance in both goal and system terms.

Learning in an alliance is valuable to the parent firms, because often they can apply it to other geographic markets, products, and businesses, as well as in other alliances (Lyles, Reference Lyles1988). On occasion, it can even enhance operations at headquarters (Inkpen, Reference Inkpen2000). In any case, any new knowledge created facilitates the alliance's own operations and helps improve its performance (Luo, Reference Luo2002d). New products, market entry (Fang, Reference Fang2011), stability, and other operational improvements are typical outcomes (Das & Teng, Reference Das and Teng2000; Fang & Zou, Reference Fang and Zou2010).

The Moderating Role of Contextual Experience

We define contextual experience as the extent to which an ISA partner has been exposed to the host country contexts, consistent with the organizational learning literature, which emphasizes learning from past experience (Cohen & Levinthal, Reference Cohen and Levinthal1990; Cyert & March, Reference Cyert and March1963). In an international alliance, prior experiences related to the partner's national context should facilitate learning and system performance (Barkema, Shenkar, Vermeulen, & Bell, Reference Barkema, Shenkar, Vermeulen and Bell1997). Although knowledge diversity may hamper knowledge exchange due to differences between the two contexts, contextual experience should tend to reduce the difficulties (Inkpen, Reference Inkpen1998). The knowledge overlap between the partners is likely to increase with experience, and as a result, the absorptive capacity of the alliance should be enhanced (Cohen & Levinthal, Reference Cohen and Levinthal1990). Specifically, when an alliance partner has prior experience working with partners from a foreign country, its ability to communicate effectively with other foreign partners should improve (Zeira & Shenkar, Reference Zeira and Shenkar1990). At the same time, its absorptive capacity is normally enhanced, and this helps it assimilate new knowledge from foreign partners in later alliances.

Trust between partners is also likely to increase with experience (Gulati, Reference Gulati1995; Larson, Reference Larson1992). Parkhe (Reference Parkhe1993) observed that prior cooperation reduces expectations of opportunistic behavior in new international joint ventures. Luo (Reference Luo2006) found that previous experience of collaboration with a foreign partner promotes fairness in interactions, more effective decision-making, greater interpersonal trust among managers, and even interorganizational attachment. Experienced partners are more willing to share information, promoting knowledge exchange despite substantial knowledge diversity. As contextual experience increases each party's absorptive capacity along with communication and trust, it is easier for the partners to learn by integrating their different ideas and perspectives. This enhances the positive influence of knowledge diversity while minimizing its negative side.

Identification of Studies

The meta-analysis covered peer-reviewed articles published between 1990 and July 2013 on the performance of international alliances in China. Chinese alliances were selected because alliances in China grew into a central focus of academic interest during this period (Yang, Tipton, & Li, Reference Yang, Tipton and Li2010). Articles were identified for analysis through searches of the Proquest databases and a manual search of individual journals to ensure the representativeness and completeness of the sample. The Proquest databases were searched first using the following keywords: alliance, joint venture, performance, China, and Chinese. Then seven premier management journals, which often publish empirical research, were searched manually: Academy of Management Journal, Administrative Science Quarterly, Management Science, Journal of Management, Journal of Management Studies, Organization Science, and Strategic Management Journal; along with three major international business journals: Journal of International Business Studies, (Columbia) Journal of World Business, and Management International Review; and the two main journals devoted to management issues in Asia and China: Asia Pacific Journal of Management and Management and Organization Review.

The third round of searching covered those of the 45 business and management journals used by the Financial Times for ranking business school research not included in the first two rounds: Entrepreneurship Theory and Practice, Human Resource Management, Journal of Applied Psychology, Journal of Business Ethics, Journal of Business Venturing, Organization Studies, and Organizational Behaviour and Human Decision Processes.

Finally, the reference lists of the articles identified as relevant were reviewed to identify any additional studies that might have been overlooked in the previous stages (Nippa, Beechler, & Klossek, Reference Nippa, Beechler and Klossek2007; Ren, Gray, & Kim, Reference Ren, Gray and Kim2009; Reus & Rottig, Reference Reus and Rottig2009; Yang et al., Reference Yang, Tipton and Li2010). However, books and articles that had not been peer reviewed were excluded.

This process identified 53 empirical studies of alliance performance in China. Of these, 7 were excluded using three criteria. First, the reported sample size and statistics had to allow applying the formulas of Hunter and Schmidt (Reference Hunter and Schmidt1990: 272) to compute a correlation coefficient. Second, only studies studying ‘clean’ samples of international alliances were included. For example, a study by Puck, Holtbrügge, and Mohr (Reference Puck, Holtbrügge and Mohr2009), which examined the conversion of joint ventures into wholly owned subsidiaries in China, was excluded. Then only studies that examined at least two of the variables of interest were included. In the end, 46 studies reporting on 49 independent samples and 204 independent correlations were considered, giving a total sample size of 28,265 alliances. Table 1 lists the articles included in the meta-analysis, and they are identified by an asterisk in the list of references.

Table 1.

Studies included in the meta-analysis

Note: *Indicates a journal not indexed by the Social Sciences Citation Index

Measures

Dependent variable. Alliances often have hybrid structures and sometimes are rather transitory, so there is no scholarly consensus about how to describe and measure alliance performance (Buckley, Glaister, & Husan, Reference Buckley, Glaister and Husan2002; Chowdhury, Reference Chowdhury1992; Ren, Gray, & Kim, Reference Ren, Gray and Kim2009). In this study, Child and Yan's approach was used and alliance performance was decomposed into goal performance, referring to the partnering firms’ satisfaction with the alliance's accomplishments, and system performance, referring to the financial performance of the alliance itself (Child & Yan, Reference Child and Yan2003).

Independent variables. In the articles analyzed, contextual distance was usually measured in one of three ways. Some studies used a Euclidian distance measure based on an index developed by Kogut and Singh (Reference Kogut and Singh1988) and Hofstede's four or five cultural dimensions (Hofstede, Reference Hofstede2001). Others used differences along contextual dimensions as perceived by the foreign and Chinese partnering firms. A few studies used a dummy variable to indicate differences between countries. Typically ‘1’ indicated that the foreign partner was from a developed economy so contextual distance was presumably large. An alliance with a foreign partner from another less developed country was typically indicated by a ‘0’ and contextual distance was presumed to be small. In this meta-analysis, the sample was split into low contextual distance and high contextual distance groups based on the different methods used in measuring contextual distance. For studies measuring contextual distance with Kogut and Singh's index, those with a contextual distance equal to or above the median value were treated as high contextual distance and the others as low. For studies measuring contextual distance using some subjective measure (e.g., ratings on a Likert-type scale), those with contextual distance at or above the midpoint were considered as high contextual distance cases. A few studies used country of origin as a proxy. There were several studies that included samples of Sino-foreign alliances from different MNC home countries. In these studies, if half or more of the foreign parents in the sample were from developed countries, the case was included in the high contextual distance group.

Moderators. We use three measures, including the length of operation, prior experience, and regional development of an alliance's location in China, to quantify contextual experience. All increase one party's exposure to the other's national context. For example, a Chinese partner will be exposed to more foreign institutional norms as cooperation proceeds. Twenty-nine of the studies reported alliance duration. The median alliance duration was used to split the sample into old and young subgroups with 15 and 14 studies respectively.

The alliance partners’ prior experience was quantified in terms of the number of years the two parties had cooperated through trade or investment before forming the alliance, and also the Chinese partner's previous alliance experience with other foreign partners and the foreign partner's previous alliance experience with other Chinese partners. The three descriptors for each alliance were summed, and the sample was again split using the mean length of prior experience to form a more experienced group and a less experienced group.

The regional development of an alliance's location was indicated using a dummy variable coded ‘1’ if the alliance was located in one of China's special economic or technology zones or in a coastal area, and ‘0’ otherwise. China's economic reform started from the nation's eastern and coastal regions before expanding to other regions. The eastern and coastal regions were better developed and attracted more alliances from other ISAs about the contextual experiences. In the developed regions, it is easier for the alliance to accumulate contextual experiences by learning from other alliances.

The measures included in the meta-analysis are summarized in Table 2.

Table 2.

Variables and measures included in the meta-analysis

Analyses

As in other meta-analytic reviews (e.g., Horwitz & Horwitz, Reference Horwitz and Horwitz2007) the correlation coefficient (r) was used as the primary index of effect size. The statistical results reported from each study were first transformed into an index of effect size by employing Fisher's r to z transformation to minimize any underestimation bias (Fisher, Reference Fisher1970; Johnson & Eagly, Reference Johnson, Eagly, Reis and Judd2000). Each study's effect size was also weighted by the sample size to capitalize on the most reliably estimated study outcomes, generally those with larger samples (Hedges & Olkin, Reference Hedges and Olkin1985; Snedecor & Cochran, Reference Snedecor and Cochran1980). Subgroup analyses with a categorical model were used to test for any moderating effects following Hedges and Olkin's approach (Reference Hong, Liao, Hu and Jiang1985), which was used in some recent studies (e.g., Hong, Liao, Hu, & Jiang, Reference Hong, Liao, Hu and Jiang2013; Kirca et al., 2011). Categorical models can provide a between-subgroup effect, Q_b, which is analogous to an interaction effect in analysis of variance, and a test of the significance of observed differences in effect sizes between subgroups.