Security, Uncertainty, and International Joint Ventures: A Game-Theoretic Approach

Abstract

This article investigates the impact of increased security measures on the stability of an international joint venture in a host country and the resultant change in negotiation power of partner firms following a security shock. Using a three-stage game under uncertainty demonstrates that the increased probability of security measures immediately following a security shock increases the negotiation power of a foreign partner and decreases that of domestic firms, which negatively impacts the host country's economy.

Keywords:

• security shock
• international joint venture
• symmetrical industry
• asymmetrical industry
• stability
• negotiation power

Acknowledgments

The Indiana University Center for International Business Education and Research (CIBER) provided financial support for this research, which is gratefully appreciated.

Notes

¹ Li et al. (2005) suggest a proposition that joint ventures are less likely to suffer decreased performance than wholly owned subsidiaries after September 11^th, but there has been no systematic investigation on the relationship between the increased security measures and the strategic responses of partner firms in the international joint ventures.

²A current IJV's partners will make a simultaneous move in the game at E₁ when they decide to terminate the current IJV. After the termination, only the foreign partner has a choice to choose from four different strategies at E₂, and its final decision will determine which market structure in which to operate. By making the best use of these two characteristics, this game can be summarized into a simple two-by-two normal-form game in the subsequent analyses.