TY - JOUR AU - Perkins,Susan AU - Morck,Randall AU - Yeung,Bernard TI - Innocents Abroad: The Hazards of International Joint Ventures with Pyramidal Group Firms JF - National Bureau of Economic Research Working Paper Series VL - No. 13914 PY - 2008 Y2 - April 2008 UR - http://www.nber.org/papers/w13914 L1 - http://www.nber.org/papers/w13914.pdf N1 - Author contact info: Susan Perkins Northwestern University Kellogg School of Management 2001 Sheridan Road, 3100 LEV, Evanston, Illinois 60208 E-Mail: s-perkins@kellogg.northwestern.edu Randall Morck Faculty of Business University of Alberta Edmonton, AB T6G 2R6 CANADA Tel: 780/492-5683 Fax: 780/492-3325 E-Mail: randall.morck@ualberta.ca Bernard Yeung National University of Singapore Mochtar Riady Building 15 Kent Ridge Drive BIZ 1, Level 6, #6-19 Singapore 119245 Tel: +65 6516 3075 Fax: +65 6779 1365 E-Mail: bizdean@nus.edu.sg AB - The fundamental unit of production in microeconomics is the firm, and this mirrors reality in the United States and United Kingdom. But elsewhere, business groups can be the more important unit, for business strategy is often formulated at the business group level, not the firm level. In many countries, this is legally enshrined in corporate governance codes that assign officers and directors a duty to act for their business group, not their firm or its shareholders. Even where a duty to individual firms' shareholders exists, business groups often have pyramidal structures of intercorporate blockholdings that entrench controlling shareholders, usually wealthy families, who run their groups to maximize their utility. This can impose exacerbated agency problems. In either case, foreign joint venture partners who expect domestic firms to maximize shareholder value can be sorely disappointed. We explain agency behavior in business groups and how controlling insiders can divert resources between firms they control, including joint ventures, to enrich themselves; and highlight differences between this behavior and agency problems in freestanding firms. We then examine the telecoms industry in Brazil, a country in which most large businesses belong to pyramidal business groups controlled by wealthy families. We find that joint ventures between Brazilian telecoms firms and partners from countries where business groups are rarer have significantly elevated failure rates; while joint ventures with foreign partners from countries where pyramidal groups are more common are more likely to succeed. We then present clinical examples illustrating the mechanisms that drive such divergent performance in joint venture partnerships. While our results are based on a single industry in a single country, we believe they highlight a previously unexamined important issue in international business strategy. ER -