Faculty Research: Susan Perkins, MORS
of the pyramid
ownership structures can make global joint ventures a challenge,
says Professor Susan Perkins
international business, companies have more than a language
barrier to navigate.
differences, legal frameworks and taxes all influence strategic
decisions. But something not typically at the forefront of
a firm's strategy is how corporate governance and ownership
structure differences in other countries can impact a business
seeking global partnerships.
to research by Susan
Perkins, Kellogg assistant professor of management and
organizations, the differences in ownership that exist around
the world can make or break a firm's success if its leaders
are unaware of such variations and the potential risks inherent
to partnership. Perkins' recent research paper, "Innocents
Abroad: Failure Rates of International Joint Ventures with
Firms in Pyramidal Groups," addresses some of the
consequences of not understanding those dynamics. This research
is a collaboration with Randall Morck, distinguished chair
and professor of finance at the University of Alberta School
of Business, and Bernard Yeung, professor of global business,
economics and management at New York University's Stern School
typical ownership structure of a U.S. or U.K. company, where
owners and managers are separate entities, is not common elsewhere,
Perkins explains. With the exception of these two countries
and others like Canada, Australia, Germany and Singapore,
the dominant ownership structures are business groups in which
owners and managers are often the same. Therefore, the core
agency problem is one of shareholder protection for outside
investors or joint venture partners. In Brazil, the focal
country of this research, and throughout Latin America, these
pyramidal ownership structures are called grupos.
of the distinguishing features of grupos is their ability
to leverage control of lower-tiered firms within their overall
portfolio of firms. They achieve this through an extraordinarily
disproportionate amount of "voting stakes" compared
with "equity stakes" in the partnering firms. For
example, in 2005 the ultimate owners of all Brazilian-listed
firms retained 85 percent of the voting rights with only 51
percent of the equity stakes in the company. Insiders who
control firms with these pyramidal structures are able to
siphon resources between the various companies they control
to further their own agendas rather than those of outside
investors or the joint venture partnership.
thinking about the expropriation risks of joint venturing
with a grupo, this paper attempts to illuminate the
pitfalls and provide strategic insight on how to avoid falling
into expropriation traps," says Perkins.
and her research colleagues examined 96 companies that have
entered the Brazilian telecommunications industry as joint
ventures. They found that the Brazilian ownership structures
combine with a foreign company in one of three ways: with
a stand-alone firm, with another pyramidal structure, or with
another form of business group (e.g. the Japanese keiretsu
or South Korean chaebols). "We measure the success
of these corporate governance and ownership structure combinations
and find a significant relationship between market failure
and having differing types of ownership structures,"
research shows that 27 percent of partnerships between stand-alone
firms and those with pyramidal structures fail. "However,
we find that pyramidal groups that partner with other pyramidal
groups have only an 8 percent likelihood of failure,"
says the Kellogg professor. "And if we compare that to
the best form of foreign entry, which is a wholly owned subsidiary,
those firms only have a 4 percent failure rate, which is not
statistically different than the 8 percent failure rate of
the pyramidal joint ventures."
other words, how different governance and ownership structures
interact will affect the success of these joint ventures.
Perkins says firms with pyramidal structures know how to manage
risk against one another better.
example, when the pyramidal groups Portugal Telecom and Telefónica
from Spain formed a partnership, they created strategies of
reciprocity by purchasing cross-holdings in each other's companies.
Other pyramidal firms have also used strategies of multiple
point competition to pose a credible threat of retaliation
for expropriation, thus reducing this risk. "If it looks
like, instead of maximizing the joint venture, I'm starting
to maximize my own wealth by siphoning out of the joint venture,
then my partner can retaliate by competing against me in other
markets," Perkins says.
research team also found evidence that companies originating
from a home country market where pyramids are dominant function
better in host countries that also are dominated by pyramids
because the players are more aware of how pyramidal grupos
behave. Conversely, firms that are from home countries that
do not have pyramids are at increased risk when entering pyramidal
timing of this study is exciting given global trade and its
importance to development of nations," says Perkins,
who uses her research insights when teaching courses like
International Business Strategy in Nonmarket Environments.
"When we think about world economies and strategies to
enable trade flows or foreign investment between nations,
much of this challenge falls at the bedrock of figuring out
the most effective alliance strategies to enable nations and
firms within nations to work together."
strategies require conducting due diligence within local markets
to learn about potential partners before forming an alliance,
she says. Equally important is thinking about nonmarket strategies.
Questions of how one navigates the 'rules of the game' in
a given corporate governance arena and the direct impact of
those decisions on one's shareholder agreement are critical
will continue to explore market volatility driven by institutional
difference to understand the strategic implications for managing
such risks. This is an area she says is underexplored. She
often refers to a large map of the world hanging in her Kellogg
office to help her frame her perspective when contemplating
dynamics of business moving between the U.S. and emerging
markets. And she constantly probes the changing institutional
landscapes in these nations.
have an interest in foreign investment and what drives economic
development and growth, particularly in emerging market economies,"
she says. "Where opportunities are the largest comes
the greatest chance of risk."