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Asia Pacific Journal of Management, 20, 91–111, 2003 c 2003 Kluwer Academic Publishers. Manufactured in The Netherlands. Franco-Chinese Joint-Venture Formation and Shareholder Wealth PIERRE-XAVIER MESCHI [email protected] Universit´ e de la M´ editerran´ ee (Aix-Marseille II) and Marseille-Provence Business School, Domaine de Luminy, BP 921, 13288 Marseille, France J ´ ER ˆ OME HUBLER [email protected] Institut d’Administration des Entreprises de Nancy, Universit´ e de Nancy 2, 13 Rue Michel Ney, 54000 Nancy, France Abstract. The main purpose of this article is to test the stock market reaction to Franco-Chinese joint venture announcements and to determine whether it is correlated with joint venture-specific and partner-specific factors. Certain factors specific either to Franco-Chinese joint ventures’ characteristics (such as coastal or inland location of French investors in China, capital ownership of French and Chinese partners in the joint ventures, announcement date, business activity of the Franco-Chinese joint ventures) or to French partners (such as their experience in managing Franco-Chinese joint ventures, their international, European experience, and more particularly their experience of Asia) will be analysed with respect to their shareholder value creation. A research sample was prepared from the publication of information on Franco-Chinese joint venture announcements in the French daily newspapers Les Echos and La Tribune between 1994 and 2000 (seven years were analysed). It is important to stress that the announcements used in this sample corresponded to the sole formation of joint ventures. This research sample was made up of 47 Franco-Chinese joint venture announcements for which the relevant abnormal returns (AAR and CAAR) were evaluated. A negative and significant valuation effect was reported for Franco-Chinese joint venture announcements for a reduced event window spanning 7 days around the day of announcement. Among the eight different variables associated with shareholder value creation, only two of them appear to be statistically significant: announcement date and international experience of French partners. First, two opposite time trends were stated in the stock market reaction (negative reaction from 1994 to 1997 and positive from 1998 to 2000). Second, French companies possessing high international experience benefit from an important and positive stock market reaction. Keywords: Franco-Chinese joint ventures, French direct investment in China, abnormal returns, shareholder wealth and event study methodology Introduction Do joint ventures create value for shareholders? The answer to this question seems to be affirmative and especially obvious in the light of the many growth opportunities offered to partners in a joint venture: economies of scope and scale, access to a new technology or skill, sharing risks and uncertainties, inter-organisational learning or facilitated entry into emerging markets or countries. Setting up business in an emerging country is one of the functions of the (international) joint venture, which is a good reflection of the potential To whom all correspondence should be addressed.

Franco-Chinese Joint-Venture Formation and Shareholder Wealth

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Asia Pacific Journal of Management, 20, 91–111, 2003c© 2003 Kluwer Academic Publishers. Manufactured in The Netherlands.

Franco-Chinese Joint-Venture Formationand Shareholder Wealth

PIERRE-XAVIER MESCHI∗ [email protected] de la Mediterranee (Aix-Marseille II) and Marseille-Provence Business School, Domaine de Luminy,BP 921, 13288 Marseille, France

JEROME HUBLER [email protected] d’Administration des Entreprises de Nancy, Universite de Nancy 2, 13 Rue Michel Ney,54000 Nancy, France

Abstract. The main purpose of this article is to test the stock market reaction to Franco-Chinese joint ventureannouncements and to determine whether it is correlated with joint venture-specific and partner-specific factors.Certain factors specific either to Franco-Chinese joint ventures’ characteristics (such as coastal or inland locationof French investors in China, capital ownership of French and Chinese partners in the joint ventures, announcementdate, business activity of the Franco-Chinese joint ventures) or to French partners (such as their experience inmanaging Franco-Chinese joint ventures, their international, European experience, and more particularly theirexperience of Asia) will be analysed with respect to their shareholder value creation. A research sample wasprepared from the publication of information on Franco-Chinese joint venture announcements in the French dailynewspapers Les Echos and La Tribune between 1994 and 2000 (seven years were analysed). It is important to stressthat the announcements used in this sample corresponded to the sole formation of joint ventures. This researchsample was made up of 47 Franco-Chinese joint venture announcements for which the relevant abnormal returns(AAR and CAAR) were evaluated. A negative and significant valuation effect was reported for Franco-Chinesejoint venture announcements for a reduced event window spanning 7 days around the day of announcement.Among the eight different variables associated with shareholder value creation, only two of them appear to bestatistically significant: announcement date and international experience of French partners. First, two oppositetime trends were stated in the stock market reaction (negative reaction from 1994 to 1997 and positive from 1998 to2000). Second, French companies possessing high international experience benefit from an important and positivestock market reaction.

Keywords: Franco-Chinese joint ventures, French direct investment in China, abnormal returns, shareholderwealth and event study methodology

Introduction

Do joint ventures create value for shareholders? The answer to this question seems to beaffirmative and especially obvious in the light of the many growth opportunities offered topartners in a joint venture: economies of scope and scale, access to a new technology orskill, sharing risks and uncertainties, inter-organisational learning or facilitated entry intoemerging markets or countries. Setting up business in an emerging country is one of thefunctions of the (international) joint venture, which is a good reflection of the potential

∗To whom all correspondence should be addressed.

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value creation inherent in this structured form of alliance. The joint venture is particularlyseen as an inevitable, effective entry mode to emerging countries whose economic, political,cultural and regulation characteristics are the most differentiated. In such a context, foundinga subsidiary out of nothing or acquiring a local company is often a long and difficult process.This is where the joint venture demonstrates its value-creating dimension by acceleratingentry, facilitating knowledge of the local environment and reducing the transaction costs(Hennart, 1988; Kogut, 1988; Hamel, 1991).

However, while their shareholder value creation potential seems considerable in theory,empirical studies that focus on analysing the stock market impact of joint venture announce-ments (MacConnell and Nantell, 1985; Finnerty, Owers and Rogers, 1986; Lee and Wyatt,1990; Woolridge and Snow, 1990; Koh and Venkatraman, 1991; Chan and Kensinger, 1997;Das, Sen and Sengupta, 1998; Cheng, Fung and Lam, 1998; Anand and Khanna, 2000;Hubler and Meschi, 2000; Ueng, Kim and Lee, 2000) have obtained inconclusive results:While certain studies identify a positive valuation effect of joint venture announcements(MacConnell and Nantell, 1985; Woolridge and Snow, 1990; Koh and Venkatraman, 1991;Chan and Kensinger, 1997; Das, Sen and Sengupta, 1998; Cheng, Fung and Lam, 1998;Anand and Khanna, 2000; Ueng, Kim and Lee, 2000), others reveal either a nonpositive(Finnerty, Owers and Rogers, 1986) or a significant negative valuation effect (Lee and Wyatt,1990; Hubler and Meschi, 2000). In addition, many other studies point out the difficultiesfaced by joint ventures in their medium and long-term value creation process. The rate offailure of joint ventures, whether identified by dissolution of the joint venture or by thedisposal of one of the partners, is still high and varies from at least 30% (Killing, 1983;Harrigan, 1988) to more than 50% (Park and Russo, 1996; Hennart, Kim and Zeng, 1997;Barkema and Vermeulen, 1997).

What factors will enable the joint venture to make the transition from that of a structurewith serious value creation potential to that of a value-creating structure? This is the centralquestion of this article. It will be viewed in the more specific context of a form of jointventure (1) whose aim is to enter a differentiated emerging country—in this particular case,China—and (2) whose structure combines French and Chinese partners. Related to thisresearch question, the main purpose of this article is to test the stock market reaction toannouncements of Franco-Chinese joint ventures and to determine whether this reaction iscorrelated with joint venture-specific and partner-specific factors. Certain factors specificeither to Franco-Chinese joint ventures’ characteristics (such as coastal or inland locationof French investors in China, capital ownership of French and Chinese partners in the jointventures, announcement date, business activity of the Franco-Chinese joint ventures) or toFrench partners (such as their experience in managing Franco-Chinese joint ventures, theirinternational, European experience, and more particularly their experience of Asia) will beanalysed with respect to their shareholder value creation.

Thus, in the first section, this article will identify the role of the joint venture as a keymeans of entry for European investors, particularly French investors, in China. The secondsection reviews prior literature on the valuation effect of Chinese-foreign joint ventureannouncements and its determinants. The third section gives details of the event studymethodology and the sample used (47 Franco-Chinese joint venture announcements se-lected from the press during the period 1994–2000). The fourth section presents empirical

FRANCO-CHINESE JOINT-VENTURE FORMATION AND SHAREHOLDER WEALTH 93

observations of the stock market reaction to 47 Franco-Chinese joint ventures and its rela-tion to Franco-Chinese joint venture-specific and French partner-specific factors. The fifthsection concludes the article.

1. The joint venture: A predominant meansof entry for European investors into China

In 1978, under the impulsion of Deng Xiaoping, China engaged in a policy of economicopenness, characterised notably by facilitated access for Foreign Direct Investment in China.Under this “open door” policy, the most favourable signal given to potential foreign investorswas the proclamation of the law of July 1st 1979 on companies with mixed Chinese andforeign capital. Otherwise known under the name of the joint ventures law, it opened thedoor to Foreign Direct Investment, but it was not much applied in early years. In fact, itwas the legislation passed in the mid-1980s and early 1990s that clarified and liberalisedthe Foreign Direct Investment environment, and led to the creation of a spectacular numberof Chinese companies with foreign capital. From the proclamation of this law in 1979 untilthe end of 1997, the responsible Chinese authorities, in this case, MOFTEC (the Ministryof Foreign Trade and Economic Cooperation), approved the founding of 316,280 Chinesecompanies with foreign capital. More than twenty million Chinese people are now employedin these companies (MOFTEC bulletin, 1998). Investments dropped in 1989–1990 followingthe events on Tian An Men Square, but they rocketed from 1993 (after Deng Xiaoping’sannouncement in 1992 of his intention to speed up reforms and deregulation of the Chineseeconomy). From then onwards, China became the second recipient of foreign investmentsafter the USA: In 1997, China received 52.4 billion US dollars of Foreign Direct Investment(MOFTEC bulletin, 1999).

Throughout this period of openness, the joint venture was by far the organisationalstructure preferred by foreign companies investing in China (The Economist, 19 April1997; Luo, 1998). From 1986, the joint venture became the leading form of Foreign DirectInvestment in China and it still remains so, both in numbers and in the amounts of contracts(MOFTEC bulletin, 2000). In 1998, out of 55 billion US dollars, the investments madethrough joint ventures represented 25.4 billion US dollars (i.e., around 46% of the totalamount) and out of 23,600 foreign investment contracts, the number of joint ventures was13,958 (i.e., around 58% of the total number). Although the ratio of Chinese subsidiaries (orof Chinese companies owned entirely by foreign capital) to all Foreign Direct Investmenthas increased recently (around 7% by number and 6% by amount in 1988, as opposed toaround 45% by number and 31% by amount in 1997), the joint venture still remains thepredominant means of entry into China. A joint venture is formed “whenever two or moresponsors bring given assets to an independent legal entity and are paid for some or all of theircontribution from the profits earned by the entity” (Hennart, 1988:361–362). In the Chinesecontext, the respective contributions of each of the foreign and Chinese partners in the jointventure are usually distinct and complementary. It follows that, in the classification of thealliances proposed by Hennart (1988), Chinese-foreign joint ventures are all “link jointventures.” Thus, the foreign partner provides technical expertise, technology and some ofthe finance, while the Chinese partner provides installations, human resources, and contacts

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with officials of the provincial and central Chinese governments, and access to the localmarket. The law on contractual joint ventures dated 13 April 1988, complementing thelaw dated 1 July 1979, and enabled Chinese partners to make use of a legal frameworkthat was more appropriate for local Chinese constraints. In addition to the “classic” jointventures, this law provides a formal legal basis for “contractual” joint ventures that arecharacterised by the dissociation of participation in capital and the division of profits.Thus, a Chinese partner can own only 30% of the joint venture’s capital and can gain50% of the profits. This enables the Chinese partner to be rewarded and remuneratedmore for the services rendered than for the pooled assets. A foreign company that needsconnections, contacts and a “door opener” can use this principle of the contractual jointventure.

In the light of the analysis of recent information on Franco-Chinese joint ventures (ChinaBusiness Review, 1998–2000; MOFTEC bulletin, 1998–2000), it is possible to identifycertain trends specific to this type of Foreign Direct Investment in China. In 1998, FrenchDirect Investment in China totalled 710 million US dollars and placed France third inthe ranks of European Union countries after Great Britain (1.2 billion US dollars) andGermany (740 million US dollars). Recent French investments have improved a relativeposition that had greatly deteriorated in 1989–1991 due to the massive inflow of investmentsfrom Taiwan and Hong Kong (1.6% of Foreign Direct Investment in 1998 as opposed toonly 0.2% in 1990 and 0.9% in 1997): French investments in China increased stronglybetween 1992 and 1996 (the annual inflow of Direct Investment gained 36% between 1993and 1994, 48% between 1994 and 1995, and 48% between 1995 and 1996). Year 1997was characterised by a slow down (only 12%) but the growth of French Direct Investmentrecovered in 1998 with a large increase (49%). The census of Franco-Chinese joint venturesgave a total of 341 at the end of 1998. Franco-Chinese joint ventures mainly set up businessin Shanghai (which represents 24% of the French Direct Investment in China), Beijing(15%), and the province of Guangdong (14%). French investors are mostly large groups,some of which have been involved in China for a long time (Secretariat d’Etat francais al’Industrie et Poste d’Expansion Economique Francais en Chine, 2000). This is the casefor Aventis (which had fourteen joint ventures in 1999, representing a total commitmentof around 400 million US dollars), Air Liquide (which had sixteen joint ventures in 1999,representing a total commitment of around 100 million US dollars) and Alcatel (which hadnineteen joint ventures in 1999, of which the largest was Shanghai Bell Co., representinga total commitment of around 600 million US dollars). Other French companies havelaunched a policy of investment more recently but with strong ambitions. This is the casefor the three large subsidiaries of the TotalFinaElf group (TotalFinaElf Hydrocarbures,TotalFinaElf Atochem and Sanofi) which have a strong presence (they had a total of eightjoint ventures in 1999); TotalFinaElf Hydrocarbures, which built the first Chinese-foreignrefinery in China (with an investment of more than 1 billion US dollars); and Pechiney (whichhad three joint ventures in 1999, representing a total commitment of around 50 millionUS dollars).

In conclusion of this current state of affairs, we can note that the diagnosis of FrenchDirect Investment in China is globally positive. However, this diagnosis is less positivewhen the question of the “balance sheet” of French Direct Investment is raised. In a recent

FRANCO-CHINESE JOINT-VENTURE FORMATION AND SHAREHOLDER WEALTH 95

comment on trade relations between the European Union and China, Gardet (1998:6) an-swered this question as follows: “The balance sheet of Chinese-European companies inChina is mixed. Some such as Siemens, Alstom or Nestle have successfully set up businessthere, others have survived, but with relatively low profits, and others, such as Peugeot,have met with failure.” In April 1997, Peugeot’s management announced its intention topull out of the GPAC joint venture (Guangzhou Peugeot Automobile Co.). At the time,this announcement had the effect of a thunderbolt in the business world, because this wasnot the recognised failure of an inexperienced small company with no back-up, but that ofEurope’s second-ranking automobile manufacturer, an investor with an international repu-tation and experience, particularly in developing countries. In addition to its symbolic andresounding nature, the announcement of Peugeot’s withdrawal was the first in a long series:Levi Strauss in 1997, Kimberly-Clark in 1998, General Electric and Occidental Petroleumin 1999. In 1999, even Volkswagen, which had been a fortunate investor until then withits SVAC joint venture in Shanghai (Shanghai Volkswagen Automotive Co.), encounteredcertain problems and disagreements with its different Chinese partners, Shanghai TractorAuto Co., Bank of China and China National Automotive Industry (Business China, 10May 1999; Hoon-Halbauer, 1999). Peugeot’s unfortunate experience in China, but also thatof Levi Strauss or of General Electric, and the recent problems encountered by previouslyprosperous joint ventures would appear to show that the profitability of joint ventures ismodest, but particularly fragile. However, Peugeot’s withdrawal only gives us a partial ideaof the viability of French Direct Investment in China.

2. The stock market reaction to Franco-Chinese joint ventureannouncements: Research literature

The inconclusive results associated with the valuation effect of joint ventures can be at-tributed to a variety of factors. Existing research literature on this topic suggests and testsdifferent explanatory factors. The factors proposed and tested are numerous and varied:they range from geographic location to the period of announcement of joint ventures, andinclude the nature of the organisational resources possessed by each partner. While notattempting to be exhaustive, our article aims to test the impact of two categories of factors:partner-specific factors (experience in managing joint ventures, international, European andAsian experience) and joint venture-specific factors (coastal or inland location of investorsin China, capital ownership, announcement date, business activity of joint ventures). Theseeight variables were selected here because they appear to present a certain explanatorypower in the research literature that is devoted to them.

2.1. Joint venture-specific variables

Firstly, the choice of testing the valuation effect of location (coastal vs. inland location)of Franco-Chinese joint ventures was made with respect to the theory of Foreign Di-rect Investment: Buckley (1988) argued that multinational companies use internationaljoint ventures to internalise their location-specific and ownership-specific advantages inorder to achieve economic benefits. Caves (1982) suggested that technological expertise

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and managerial knowledge are the most important factors for multinational companies inwell-developed countries in Western Europe and North America to gain revenue throughestablishing joint ventures in emerging countries such as China. Based on this argument,maximum economic benefits can be achieved by establishing joint ventures in locationswhere (1) operating cost is lower and (2) technological and managerial expertise areneeded the most. Comparing inland with coastal areas in China, it is obvious that dueto the transportation advantage of coastal cities, multinational companies chose to investthere first and they became better developed in the early 1990s. Thus, these coastal ar-eas have better-developed technical know-how and also higher labour costs. Consequently,the location and ownership advantages offered by Chinese partners to the multinationalcompanies in coastal areas have decreased through the years. In order to maximize the eco-nomic benefits from Foreign Direct Investment, inland location would be a more valuablechoice.

The second significant variable is capital ownership of the Franco-Chinese joint ventures.The ownership can be divided unequally, with one partner holding a majority stake, or itcan be divided equally (50/50). As we mentioned in our argument related to location, in-tangible assets such as technological and managerial knowledge enable foreign companiesto increase revenue by setting up joint ventures in emerging countries such as China. Thisargument assumes that the foreign companies have the authority and autonomy in transfer-ring this expertise into the joint ventures. Buckley (1988) suggested that ownership-specificadvantages for multinational companies could be internalised by using international jointventures. Therefore, the ability to make decision, which is strongly related to the percentageownership in the joint venture, becomes a determining factor to realize the economic benefitsof Foreign Direct Investment mentioned above. In other words, when the European partnerspossess majority ownership in the joint ventures, they can better control the technologytransfer to the operation as well as the joint venture management, which is very importantfor the success of the joint venture. From the foreign partner point of view, holding a ma-jority stake is preferable to holding a minority one. Furthermore, certain empirical studies(Killing, 1983; Shenkar and Zeira, 1990) stated that international joint ventures where theforeign partner holds a majority stake appear to be preferable to those where there is a 50/50share of capital: “A 50/50 division of capital is without doubt to be avoided” (Knittel andStefanini, 1993:22). Indeed, a 50/50 share of capital between the two partners often leadsto conflicts and difficulties in decision-making, and generates poor performance of the jointventure (Shenkar and Zeira, 1990).

Lastly, the choice of also introducing the date of announcement and the business activityof Franco-Chinese joint ventures in the variables that explain the valuation effect is notbased on any precise prior literature. Indeed, the analysis of the valuation effect of thesetwo variables is less evident but it can be considered, notably for the announcement date(or year) of joint venture creation in China, because certain years were not particularlyfavourable to their development (such as the Asian crisis in 1997 and its continuation in1998). While these two variables have not been put through empirical tests, some studieshave nevertheless attributed a certain explanatory power to them (Cheng, Fung and Lam,1998; Ueng, Kim and Lee, 2000). This is why we decided to include them in a model thatexplains the valuation effect of Franco-Chinese joint venture announcements.

FRANCO-CHINESE JOINT-VENTURE FORMATION AND SHAREHOLDER WEALTH 97

2.2. Partner-specific variables

Knowledge of a country, i.e., of its political situation, its regulations and its economic,commercial and financial characteristics, is an organisational resource that can be veryuseful for the companies engaged in an international growth strategy. In the context of aninternational growth strategy, knowledge of management of a structural form such as theinternational joint venture is also a major asset for a company. These resources are both basedon individual and organisational information, experience and know-how. They correspondto the repetition, experimentation and accumulation of know-how (relating to a country andto the management of a structural form) and are derived from organisational learning. Ifthey are maintained, developed and combined, these resources support and strengthen theinternational growth strategy of the company that possesses them. Taking the example ofChina and a possible French investor, the combination of knowledge of this geographicalarea and of managing Franco-Chinese joint ventures will directly determine the success orfailure of the French company’s business in China.

These two resources “appear” in the organisation after a period of organisational learningthrough the accumulation of experience and intelligence in experimentation (Argyris andSchon, 1996). Learning these resources is a cumulative process. Thus, with time, repeatedexperience and new experimentation specific to a country and to managing internationaljoint ventures add together and enhance individual and organisational knowledge. Whetherregarding knowledge of a country and the way to set up business in it (Hu, Chen and Shieh,1992; Chang, 1995) or the knowledge of management of joint ventures and alliances (Gulati,1995; Kale, Singh and Perlmutter, 2000; Anand and Khanna, 2000), empirical studies haveshown that “companies learned to create more value when they accumulated experience[relative to a country and to management of joint ventures and alliances]” (Anand andKhanna, 2000:313).

3. Event study methodology and research sample description

The event study methodology was used to assess the impact of Franco-Chinese joint ventureannouncements on the stock market returns of French companies involved in this interna-tional cooperation. Taking inspiration from the initial experimentation by Fama et al. (1969),this methodology is based on the idea that the stock market reacts immediately to announce-ments that are supposed to affect the future performance of the quoted company. This ideaaccording to which the stock market takes all information into account (particularly in-formation from the quoted companies) was spread through chartist or technical analysis.Abowd et al. (1990:205) defined an event as “an announcement by the firm or an action inthe marketplace that conveys incremental information to stock market participants allowingthem to revise prior expectations regarding the prospects of a corporation.” The use of thismethodology makes it easy to highlight the studied announcement’s impact on the price ofa share during a given period (i.e., the abnormal return), by comparing its real observedreturn during this period with the return that it would have had during this period if theannouncement had not been made (i.e., the normal return). The normal return was estimatedusing a market model developed by Fama et al. (1969). This classic model establishes a

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linear relation between (a) the equilibrium yield of a share during a period of 150 days(from t − 160 to t − 11) before the beginning of the chosen event window (from t − 10 tot + 10) and (b) the average stock market return. The CAC-40 index was used to assess theFrench Stock Market average returns. This classic linear model was calculated as follows:

R j t = α j + β j Rmt + ε j t

R j t and Rmt are respectively the return of share j and the market return during the period t .The two coefficients α j and β j (ε j t is the residual error with an average equal to zero) arestable and effectively estimated during a period of time that is not under the influence of theevent. The model is applied to evaluate the return of share j during a period t belonging tothe period of the event as it would have been established if the event had not occurred. Testswere then carried out to judge the statistical significance of these estimations: (a) Fisher-Snedecor F tests to judge the model’s overall significance, and (b) Student t tests for theregression’s two coefficients. Then all shares for which results of the F test or t test were notsignificant (at the 5% threshold) were withdrawn from the sample. Note that the results ofthese two tests were practically always identical. In almost all cases, the shares withdrawn (3in all) from the sample were withdrawn because of their simultaneous lack of significance inthese two tests. Finally, the estimated models were used to evaluate normal returns of sharesduring the event window. The difference found (between the observed return and the normalreturn estimated for each day of the event window), called the abnormal return, was theninterpreted as the measure of the announcement’s impact on the price of the share during thisperiod. Therefore the abnormal return of a share j during a period t was calculated as follows:

AR j t = OR j t − R j t

AR j t represents the estimated abnormal return of share j at date t , OR j t the observed returnof share j at date t and R j t the estimated normal return of share j at date t . The normal returnof each share was thus evaluated, for each day of the event window, from t −10 to t +10. Theabnormal returns of the different shares were first aggregated in the form of average abnormalreturns (AAR), which correspond to a precise date (AARt ). Then, these average abnormalreturns were cumulated (CAAR) over the entire supposed period of impact of the announce-ment on share prices (i.e., the event window). AAR and CAAR were calculated as follows:

AARt = 1

N∑

j

AR j t and CAARt =t∑

t=−10

AARt

N is the total number of shares whose abnormal return was estimated for each day duringthe period of the event from t − 10 to t + 10. These abnormal returns (AAR and CAAR)were subjected to statistical tests (Z test) designed to judge the significance of the relationbetween Franco-Chinese joint venture announcements and the stock market value of theFrench companies analysed. In this aim, the abnormal returns were standardised (SAR)using standard deviation of the abnormal returns of each share (SD). These standardised

FRANCO-CHINESE JOINT-VENTURE FORMATION AND SHAREHOLDER WEALTH 99

abnormal returns were estimated for the 150 days before the event window:

Zt =∑N

j SAR j t√N

with SAR j t = AR j t/SD j t .

A research sample was constituted on the basis of published information concerning an-nouncements of the formation of a Franco-Chinese joint venture in the French newspapersLes Echos and La Tribune, between 1994 and 2000. All the Franco-Chinese joint ventureannouncements published during this period were selected. Our selection process was com-pletely exhaustive. It is important to stress that the announcements chosen in the samplecorresponded exclusively to the formation of joint ventures. Announcements concerningR&D, franchises, licence agreements, etc., were ignored. Then announcements were leftout that concerned French companies whose shares are not quoted in one of the “Frenchshares” sections of the French Stock Market. In the end, the research sample consisted of47 announcements for which the relevant abnormal returns were evaluated. The detaileddescription of the sample shows that it is characterised by particular trends representativeof the current orientation of French Direct Investment in China. These trends of the samplecan be summarised as follows:

1. Most Franco-Chinese joint ventures were formed between 1994 and 1996. The Asianeconomic crisis in 1997 can partly explain the decrease in number of alliances after thatdate, but other factors can be put forward (increase in the size of investments in jointventures, recourse to other modes of investment, etc.).

2. Most of these joint ventures’ capital is nearly always held by the French partner (38announcements out of 47).

3. Most French investment in the framework of joint ventures is in coastal industrialprovinces of China (39 announcements out of 47; the rest of the announcements con-cern non-coastal regions), which are the most economically developed (particularlyGuangdong province and Shanghai municipality, which ranks as a province). This thirdspecific feature of this sample is similar to that observed for all Franco-Chinese jointventures by the Poste d’Expansion Economique Francais en Chine.

4. French companies in the sample are recurrent investors in Franco-Chinese joint ventures.Several announcements of the formation of a Franco-Chinese joint venture concerningthe same French company were recorded, including Aventis (5 announcements), Danone(4 announcements), Air Liquide (3 announcements), Saint-Gobain (3 announcements),Valeo (3 announcements) and TotalFinaElf (3 announcements).

4. The stock market reaction to Franco-Chinese joint venture announcements:Positive, indifferent or negative

4.1. The stock market reaction to Franco-Chinese joint venture announcements:Empirical results

Table 1 reports the daily (AAR) and cumulative average abnormal return (CAAR) ofthe research sample of 47 Franco-Chinese joint venture announcements. The eventual

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Table 1. Abnormal returns (AAR and CAAR) and Z test related to the formation of 47 Franco-Chinese jointventures.

Day AAR (%) CAAR (%) over 21 days CAAR (%) over 7 days

−10 −0.18743 −0.18743

−9 0.47443∗ 0.28701

−8 0.27102 0.55803

−7 −0.02565 0.53238

−6 −0.39488∗ 0.13749

−5 0.27043 0.40793

−4 0.23582 0.64376∗

−3 −0.79842∗∗∗∗ −0.15467 −0.79842∗∗∗

−2 −0.21249 −0.36716 −1.01092∗∗∗∗

−1 0.25683 −0.11033 −0.75409∗∗

0 (Announcement) −0.05889 −0.16922 −0.81298∗∗∗

+1 0.11134 −0.05787 −0.70163∗∗

+2 −0.20572 −0.26360 −0.90736∗∗∗

+3 −0.13742 −0.40103 −1.04478∗∗∗∗

+4 0.14101 −0.26001

+5 0.00259 −0.25741

+6 0.11586 −0.14154

+7 0.40419∗ 0.26265

+8 −0.03808 0.22457

+9 −0.27545 −0.05088

+10 0.00491 −0.04597

∗ p < 0.1, ∗∗ p < 0.05, ∗∗∗ p < 0.01, ∗∗∗∗ p < 0.005.

significance of abnormal returns (determined in the Z test) in tests performed is speci-fied at the usual statistical thresholds (i.e., 0.5%, 1%, 5% and 10%).

For Franco-Chinese joint venture announcements, a significant negative cumulative im-pact was shown for the entire reduced event window spanning 7 days (i.e., three days beforethe announcement, the day of the announcement and three days after the announcement).The variations in these cumulative average abnormal returns shows the event’s relativelystrong impact, starting after the date of its public announcement and continuing within arange of between −0.7% and −1.04% (see Table 1). The strong negative stock market re-action negative (see AAR) observed on the third day before the announcement (−0.798%)would indicate that the news of these joint ventures gradually reached most of the stockmarket investors before they were announced publicly in the press. This gradual nature ofthe circulation of information and its reflection in market prices is clearly shown by the factthat no significant average abnormal return is associated with the date of the announcementitself, although some significant average abnormal returns occur on different dates (−9, −6and +7) during the event window.

FRANCO-CHINESE JOINT-VENTURE FORMATION AND SHAREHOLDER WEALTH 101

Table 2. CAAR during different periods, coastal location, capital ownership and business activity of the 47Franco-Chinese joint ventures: Multiple regression (t, F and r2 values).

CAAR CAAR CAAR CAAR CAARVariables [−10, −3] [−2, +2] [−2, −1] [0, +2] [+3, +10]

Coastal location 0.061 (0.4) −0.15 (−1.02) −0.1 (−0.66) −0.13 (−0.88) 0.06 (0.38)

Capital −0.148 (−0.94) 0.1 (0.65) −0.01 (−0.074) 0.14 (0.88) 0.011 (0.07)

Business activity −0.109 (−0.71) 0.31 (1.75)∗ −0.012 (−0.074) 0.146 (0.96) −0.001 (−0.009)

Value of Fa 0.71 {0.54} 1.72 {0.18} 0.84 {0.48} 1.14 {0.0.34} 0.05 {0.98}r2 0.049 0.12 0.056 0.075 0.003

aValues of t and p are presented between parentheses (t) and {p}.∗ p < 0.1.

These results are distinguished from those obtained regarding Chinese-US joint ventureannouncements. Indeed, certain North American studies found positive appreciation relatedto Chinese-US joint venture announcements (Chen, Hu and Shieh, 1991; Gupta et al., 1991;Hu, Chen and Shieh, 1992; Cheng, Fung and Lam, 1998; Ueng, Kim and Lee, 2000). Onlythe study by Lee and Wyatt (1990) finds negative depreciation, but for a limited sample of11 announcements.

The unfavourable stock market variations shown in Table 2 and figure 1 reveal a certaindistrust that the French Stock Market appears to have regarding the experiences of Franco-Chinese joint ventures that are seen as a means of creating wealth for shareholders. Con-sidering the positive valuation effect of Chinese-American joint venture announcements,several explanations (which would need to be supported by additional studies) may be put

-1,5%

-1,0%

-0,5%

0,0%

0,5%

1,0%

-10 -8 -6 -4 -2 0 2 4 6 8 10AAR

CAAR over 21days

CAAR over 7 days

Day of Announcement

Figure 1. Abnormal returns (AAR and CAAR) and Franco-Chinese joint venture announcements.

102 MESCHI AND HUBLER

forward to explain these opposite stock market reactions to Foreign Direct Investment inChina. First of all, China is a geographical area that is particularly appreciated by Americancompanies (in 1997, American Direct Investment in China reached 3.4 billion US dollars,ranking the U.S.A. in second place after Hong Kong). Also, geographical proximity hasmade China central to American geopolitical interests for a long time. Lastly, the existenceof a large Chinese “Diaspora” on the West Coast of the United States has enabled Americancompanies to develop their Chinese business with the aid of bicultural “expatriates” whoare at ease in the context of Chinese-American joint ventures.

4.2. The stock market reaction to Franco-Chinese joint venture announcements:Empirical examination of joint venture-specific determinants

Four Franco-Chinese joint venture-specific variables (coastal or inland location of Frenchinvestors in China, capital ownership of French and Chinese partners in the joint ventures,announcement date, business activity of the Franco-Chinese joint ventures) were correlatedwith CAAR during five different periods (i.e., [−10, −3], [−2, +2], [−2, −1], [0, +2] and[+3, +10]). These four variables were selected because of their assumed impact (ascertainedby empirical observations and by analysis of the literature) on shareholder value creation.On the basis of statistical multivariate regression (see Table 2), we sought to explain theobserved CAAR variation by the variation of three independent variables: Coastal or inlandlocation of French investors in China (variable coded 0 for inland and 1 for coastal), capitalownership of French and Chinese partners in the joint ventures (variable coded 0 for Chinesemajority, 1 for 50/50 and 2 for French majority) and business activity of the Franco-Chinesejoint ventures (variable coded 0 for services and 1 for industrial activity).

Table 2 presents the CAAR analysed as a function of these three explanatory variables.It appears that the quality of the tested explanatory model is globally low: the F value issignificant for none of the five multiple regressions. Compared to other studies (Chen, Huand Shieh, 1991; Cheng, Fung and Lam, 1998) that used the same explanatory variablesbut in a different context (average abnormal returns related to Chinese-US joint ventureannouncements), the overall low quality of our explanatory model is not surprising. Indeed,those Chinese-US studies came to the conclusion that there was no real explanatory powerassociated to the model. Those studies suggested introducing new explanatory variables:(1) variables concerning the foreign partner, such as its international (and Asian) experienceand its shareholder structure, and (2) variables concerning the geographical zone involved,such as, for instance, the assessment of the country risk. However, a more precise analysisof the Table 2 results, and notably the significance (at p < 0.1) of the business activityvariable during the period [−2, +2], allows us to go a little further in the analysis. Duringthe period [−2, +2], the business activity of the Franco-Chinese joint ventures is positivelycorrelated to the CAAR (p < 0.1). Even though the coastal location of French investorsin China and the capital ownership of French and Chinese partners in the joint ventures donot seem to be explanatory variables, it is not the case for the business activity variable.For those days and in the specific case of the formation of Franco-Chinese joint ventures,we can note that the French Stock Market seems to be favourable to an investment inservices.

FRANCO-CHINESE JOINT-VENTURE FORMATION AND SHAREHOLDER WEALTH 103

Table 3. CAAR during different periods and announcement date of the 47 Franco-Chinese joint ventures: Single-factor analysis of variance.

CAAR CAAR CAAR CAAR CAAR CAARVariables [window] [−10, −3] [−2, +2] [−2, −1] [0, +2] [+3, +10]

Announcementdate a

1994 −1.4% (4.2%) 1.4% (2.8%) 1% (2.2%) 0.4% (1.8%) −1.2% (3.8%)

1995 −3.3% (4.5%) −0.2% (2%) 0.2% (1.5%) −0.3% (3%) −0.003% (1.9%)

1996 −0.7% (3.6%) −0.3% (3.3%) −0.1% (1.8%) −0.2% (2.3%) 0.2% (4.7%)

1997 −1.6% (3.4%) −2.9% (2%) −1.1% (1.4%) −1.8% (2.1%) −0.3% (3.5%)

1998 5.8% (5.7%) −2.8% (7.5%) −2.2% (2.6%) −0.6% (6.2%) −1% (6.6%)

1999 0.3% (6%) 2.2% (5.5%) 1.9% (2.8%) 0.3% (5.2%) 2.1% (1.3%)

2000 6.2% (7.2%) 2.6% (8.9%) 1.2% (3.2%) 1.4% (6.6%) 2.6% (8.1%)

Value of Fb 3.41 {0.008}∗∗∗ 1.18 {0.33} 1.93 {0.09}∗ 0.38 {0.88} 0.5 {0.8}Fisher PLSD

test (Cal-culationof MeanDeviation)

1994 vs. 1998∗∗ 1994 vs. 1997∗ 1994 vs. 1997∗

1994 vs. 2000∗∗∗ 1994 vs. 1998∗ 1994 vs. 1998∗∗

1995 vs. 1998∗∗∗ 1997 vs. 2000∗ 1995 vs. 1998∗

1995 vs. 2000∗∗∗ 1998 vs. 2000∗ 1996 vs. 1998∗

1996 vs. 1998∗∗ 1997 vs. 1999∗

1996 vs. 2000∗∗∗ 1998 vs. 1999∗∗

1997 vs. 2000∗∗ 1998 vs. 2000∗∗

Only statistically significant results are presented in the table.aTotal number in 1994 (10 announcements), in 1995 (8), in 1996 (11), in 1997 (5), in 1998 (4), in 1999 (3) and in2000 (5).bValues of t and p are presented between parentheses (t) and {p}.∗ p < 0.1, ∗∗ p < 0.05, p < 0.01.

The single-factor analysis of variance laid out in Table 3 completes the testing of theabove model by questioning the valuation effect of the announcement date of joint venturecreation. Seven years (1994–2000) were tested.

Results in Table 3 show that relation associating CAAR with the “announcement date”variable appears to be statistically significant for certain periods within the event window([−10, +3] and [−2, −1]). The positive or negative signs of CAAR make sense when sta-tistical paired comparisons (Fisher PLSD test) between years are conducted. The analysis(of variance) of years taken two by two emphasizes the importance of year 1998. 1998reveals a turning point in the stock market valuation of Franco-Chinese joint ventures (seefigure 2): Before 1998, CAAR remain negative and from 1998, Franco-Chinese joint ventureannouncements record high and positive CAAR. This specific year differentiates it fromother years according the extent and direction of the CAAR. 1998’s CAAR are positive andstatistically significant (for the whole event window and for the period [−10, −3]) whilethe days around and after the date of announcement are globally characterised by a neg-ative valuation. The negative 1998’s CAAR (−2.8% during the period [−2, +2], −2.2%during the period [−2, −1], −0.6% during the period [0, +2] and −1% during the period[+3, +10]) could be explained by certain corrective behaviour of the French Stock Market.The analysis of figure 2 also shows that the formation of Franco-Chinese joint ventures

104 MESCHI AND HUBLER

-3%

0%

3%

6%

9%

-10 -8 -6 -4 -2 0 2 4 6 8 10

CAAR 1994-1997

CAAR 1998

CAAR 1999-2000

Day of Announcement

Figure 2. CAARs over different years (1994–1997, 1998 and 1999–2000).

announced in 1998 seemed to influence abnormal returns momentarily over the days imme-diately before and after the date of announcement; however, not prolonged influence wasobserved. This influence appeared to have a positive effect on stock market valuation. Thegraphic representation (see figure 2) of 1998’s CAAR over the ten days following the dateof announcement clearly demonstrates strong growth in the CAAR just after the date ofannouncement; but CAAR then returned to a level close to its low, initial level at the endof the event window. If, in 1998, the announcement of the formation of a Franco-Chinesejoint venture created a significant value for shareholders of the French company involved,this value creation remains nevertheless short-lived and appears difficult to prolong. Unlike1998, the valuation effect recorded for years 1999 and 2000 is stable over time. In thelight of the distinction between 1998 and 1999–2000, one can see that only Franco-Chinesejoint ventures formed in 1999 and 2000 really create strong shareholder value (with CAARvalues that reach a peak of around +9% at the end of the event window).

To sum up, the overall weakness of our first explanatory model can be highlighted. Itcould be improved if it were to include additional explanatory variables focused not onlyon the nature of the (Franco-Chinese) joint venture but also on the nature of the (French)partner. Concerning the quality of this model, our results are consistent with those of theNorth American literature.

4.3. The stock market reaction to Franco-Chinese joint venture announcements:Empirical examination of French partner-specific determinants

Four French partner-specific variables (French partners’ experience in managing Franco-Chinese joint ventures and their international, European experience, and more particularly

FRANCO-CHINESE JOINT-VENTURE FORMATION AND SHAREHOLDER WEALTH 105

their experience of Asia) were correlated with CAAR during five different periods (i.e.,[−10, −3], [−2, +2], [−2, −1], [0, +2] and [+3, +10]). This second explanatory modelexamines the way in which the stock market value of the French companies involvedis affected by their experience (through accumulating, codifying and sharing experiencewithin a company) in managing a specific organisational structure (in this particular case,the Franco-Chinese joint venture) and by their knowledge of a geographical area (in thisparticular case, Asia). These two variables were selected because of their assumed impact(ascertained by empirical observations and by analysis of the literature) on shareholdervalue creation (Hu, Chen and Shieh, 1992; Gulati, 1995; Kale, Singh and Perlmutter, 2000;Anand and Khanna, 2000). From these assumptions, French companies with a certaininternational/Asian experience and experience in managing Franco-Chinese joint venturescreate greater value for shareholders than those that have little or none of this experience.On the basis of a multiple regression (see Table 4), we sought to explain the observedCAAR variation by the variation of four variables of experience (managerial, international,European and Asian). The first variable (i.e., experience in management of Franco-Chinesejoint ventures or managerial experience) was measured for all French partners by identifying,year after year throughout the period studied (from 1994 to 2000), the number of Franco-Chinese joint ventures in which they had been previously engaged prior to the announcementdate of creation of a new joint venture. To this number was added the formation of anadditional joint venture, therefore giving us a minimum managerial experience score of1. The variable of international, European and Asian experience was devised by using thepercentage of annual sales figure per area achieved by French companies in the sample. Thisindicator was calculated for the “Europe (excluding France),” “International/Global” and“Asian” areas for every year corresponding to the announcement date of the formation of anew joint venture. Table 4 presents a description of these different measures of experience.

Table 4 summarises statistics concerning the test of the second explanatory model andpresents variations in shareholder value creation (CAAR) according to the different levels

Table 4. CAAR during different periods; international, European, Asian and managerial experience of the 47Franco-Chinese joint ventures: Multiple regression (t, F and r2 values).

Variables CAAR [−10, −3] CAAR [−2, +2] CAAR [−2, −1] CAAR [0, +2] CAAR [+3, +10]

Managerial 0.12 (0.76) 0.14 (0.96) −0.01 (−0.07) 0.2 (1.38) 0.028 (0.17)experience

International 0.11 (0.5) 0.36 (1.71)∗ 0.11 (0.5) 0.41 (1.97)∗∗ 0.1 (0.45)experience

European −0.15 (−0.76) 0.03 (0.17) 0.11 (0.5) −0.034 (−0.18) −0.098 (−0.48)experience

Asian 0.014 (0.08) −0.25 (−1.58) −0.08 (−0.48) −0.28 (−1.81)∗ −0.032 (−0.18)experience

Value of Fa 0.39 {0.81} 1.94 {0.12} 0.38 {0.81} 2.44 {0.06}∗ 0.09 {0.98}r2 0.036 0.15 0.035 0.19 0.009

aValues of t and p are presented between parentheses (t) and {p}.∗ p < 0.1, ∗∗ p < 0.05.

106 MESCHI AND HUBLER

of the four forms of experience. The overall statistical validity of this explanatory modelwas demonstrated only on the period [0, +2] (at p < 0.1). The significance (at p < 0.05)of the international experience as well as those of Asian experience of French partners(at p < 0.1) during the period [0, +2] allows us to go a little further in the analysis.During this period, multiple regression results oppose the international/global experienceto the more specific Asian experience of French partners. As regards experience of thegeographical area, the detailed analysis of multiple regression results shows also that thelevel of European experience has no significant impact on abnormal returns. For a Frenchcompany involved in the process of forming a joint venture in China, a high level of Asianexperience does not seem to be perceived favourably by a stock market that apparentlyvalues international experience much more. As a result, French companies marked by amajor and exclusive involvement in Asia, and especially in China, are considered not verycapable, or even incapable, of successfully forming and managing new alliances. Whilethe negative valuation effect of important Asian experience appears surprising, the positivestock market impact of French companies with no or little Asian experience is much moresurprising. As regards the absence of impact of European experience and the negative impactof Asian experience, the significant positive results associated with international experienceand little or no Asian experience stands out singularly and requires some comments.

First, the stock market appears to attribute a premium to French companies that have notbeen heavily involved in a specific area (Europe or Asia) but that have developed “multi-region” experience. Most of these companies can be considered to be multinationals (e.g.,Danone, Air Liquide, TotalfinaElf, Aventis, Michelin or Alcatel), and it is possible thatthe stock market appreciation observed in the case of major international experience is theconsequence of a premium attributed to the “multi-national” knowledge and also to the sizeof French companies involved in joint ventures in China. The existence of this premium isquite logical as multinational-networked companies appear to be more capable of benefitingfrom the entry into a new market and absorbing the large amount of costs associated with themarket entry process than less internationally-experienced companies. Second, the stockmarket appears to attribute a premium to French companies operating in China for the firsttime. This stock market appreciation observed in the case of no or little Asian experienceis the consequence of a premium attributed to a “new entrant” (to China) or a pioneerstrategy.

As regards experience in management of Franco-Chinese joint ventures, no significantimpact on CAAR was observed. Table 4 shows that French companies involved in jointventures in China do not gain any premium on the stock market if they have solid alliancemanagement experience (experience in setting up and managing joint ventures). This resultis not consistent with certain studies that had pointed out and confirmed the existence of apremium related to managerial experience (Gulati, 1995; Kale, Singh and Perlmutter, 2000;Anand and Khanna, 2000).

5. Conclusion

The central question of this article was “what factors will enable the joint venture to makethe transition from that of a structure with serious value creation potential to that of a

FRANCO-CHINESE JOINT-VENTURE FORMATION AND SHAREHOLDER WEALTH 107

value-creating structure?” In order to start to answer this question, two explanatory modelswere proposed and tested. More precisely, in this study, this consisted in testing the stockmarket reaction to Franco-Chinese joint venture announcements and to determine whetherthis reaction is correlated with joint venture-specific and partner-specific factors. Differentinsights can be drawn from our article.

Firstly, our results reinforce the inconclusive character of studies performed on the valu-ation effect of joint ventures: While certain studies document a positive valuation effect ofjoint venture announcements (MacConnell and Nantell, 1985; Woolridge and Snow, 1990;Koh and Venkatraman, 1991; Chan and Kensinger, 1997; Das, Sen and Sengupta, 1998;Cheng, Fung and Lam, 1998; Anand and Khanna, 2000; Ueng, Kim and Lee, 2000), our re-sults reveal a significant negative valuation effect. A negative and significant valuation effectis reported for Franco-Chinese joint venture announcements for a reduced event windowspanning 7 days (i.e., three days before the announcement, the day of the announcement andthree days after the announcement). Over this event window [−3, +3], the CAAR varieswithin negative values ranging from −0.7% to −1.04% (see Table 1).

Secondly, the test of the two explanatory models is disappointing. Only the second modelconcerning partner-specific variables presents a significant overall validity (at p > 0.1),solely for the period [0, +2]. The non-significance of the model concerning joint venture-specific variables shows that the stock market does not seem to give special attention tolocation, to capital ownership or to business activity of Franco-Chinese joint ventures. Thisobservation is not surprising if we refer to the few studies that have tested these variables,also without conclusive results, in the context of Chinese-US joint ventures (Chen, Hu andShieh, 1991; Cheng, Fung and Lam, 1998). Analysis of the explanatory power of these fourjoint venture-specific variables only reveals one variable that has particularly significantimpact: the announcement date.

The significance of the valuation effect of the year of joint venture creation indicatesthat the French Stock Market reaction to Franco-Chinese joint venture announcements wasnot the same according to the year of formation. From our point of view, the two oppo-site time trends stated in the French Stock Market reaction (negative reaction from 1994to 1997 and positive from 1998 to 2000) can be explained by the evolution of Chineseeconomical factors. As China has been steadily improving its economical context for For-eign Direct Investment, we can point out that later Franco-Chinese joint ventures receiveda major and positive valuation: the more recent the Franco-Chinese joint venture is, themore the value created for shareholders. Thus, the unfavourable stock market variationsreported from year 1994 to year 1997 was reflecting at that time a sceptical attitude to-wards changes in the Chinese economy and a negative perception of events that were partof a short-term geo-economic context. Some of these events were particularly sensitivefor stock market stakeholders. For instance in 1996, the spectacular announcement of thebankruptcy of the GITIC investment fund (the Guangdong International Trust & Invest-ment Co. leaves liabilities totalling 4.4 billion US dollars) caused a stir in the stock marketand financial world. In addition, the proposed liquidation of GITIC and the possibilitythat the 135 foreign financial institutions involved may not be refunded were not reas-suring news for western stock markets (in particular, the French Stock Market). GITIC’sbankruptcy, and especially the manner in which the liquidation was to be handled, set the

108 MESCHI AND HUBLER

tone for the enormous financial and economical restructuring that was looming in 1997 inChina.

The non-significance (apart from the period [0, +2]) of the model concerning partner-specific variables, and more specifically experience variables, is more surprising. As op-posed to the doubtful influence of joint venture-specific variables (Chen, Hu and Shieh,1991; Cheng, Fung and Lam, 1998), the influence of experience variables was much lessdoubtful, particularly if one refers to the numerous studies that have confirmed their impacton shareholder value creation (Hu, Chen and Shieh, 1992; Gulati, 1995; Kale, Singh andPerlmutter, 2000; Anand and Khanna, 2000). This is all the more surprising since empiri-cal studies focused on other growth and entry modes (particularly acquisitions) also foundan influence of experience variables (Singh and Zollo, 1998; Meschi and Metais, 2001;Markides and Oyon, 2001). Analysis of the explanatory power of the four experience orpartner-specific variables only identifies the international experience of French partners. In-deed, French companies possessing high international experience benefit from an importantand positive stock market reaction.

The observation of the absence of valuation effect of experience in managing Franco-Chinese joint ventures does not appear to be at all consistent with empirical studies per-formed on this subject (Gulati, 1995; Kale, Singh and Perlmutter, 2000; Anand and Khanna,2000). In the context of our sample, the stock market reaction to joint venture announcementsmade by experienced French companies is not different from that found for joint ventureannouncements made by less experienced French companies. However, in-depth analysisof certain cases of French companies present within our sample, notably that of Danone,reveals a clear positive valuation effect of their experience in managing Franco-Chinesejoint ventures (see Appendix). Thus, within our sample, a few experienced companies havea shareholder value creation greater than that of less experienced companies, but especiallygreater than that of companies of similar experience. This would suggest major variance ofshareholder value creation among the group of experienced companies. This is consistentwith Anand and Khanna’s conclusion (2000:313) on the valuation effect of experience inmanaging alliances and joint ventures: “There were major persistent differences betweencompanies in their capacities to create value [relative to their experience in joint venturesand alliances].”

Appendix

The development of the Danone food processing company in China is a good illustrationof an organisation’s capacity to create value for its shareholders as it gradually builds onexperience in setting up and managing Franco-Chinese joint ventures. In the 1994–2000period, four joint ventures in which Danone was involved were identified and included inthe sample for this study:

– The first was announced on 1 January 1994. This joint venture, named “Shanghai DanoneYogurt” (whose purpose was to produce yoghurt and dairy products), associated Danone(which held 42.2% of the new structure) with a Chinese company, Shanghai Dairy (whichheld the remainder of the capital).

FRANCO-CHINESE JOINT-VENTURE FORMATION AND SHAREHOLDER WEALTH 109

– The second was announced on 7 July 1994. This joint venture, called “Shanghai AmoySeagull Foods” (whose purpose was to produce soya sauces), associated Danone (whichheld 60% of the new structure) with Seagull (which held 40% of the jointventure).

– The third was announced on 12 May 1995. It associated Danone (which held 68% ofthe new structure) in Jiangmen (which held 32% of the joint venture). This joint venture(based in Guangzhou) for biscuit production was completely bought over in 1998 byDanone’s Chinese biscuits subsidiary in Shanghai, “Shanghai Danone Biscuits Foods.”

– The last was announced on 2 April 1996. This joint venture, called “Huangzhou DanoneWahaha Group” (whose purpose was to produce milk drinks), associated Danone (whichcontrolled 38.4% of the new structure) with the Wahaha Group (which held 61.6% of thejoint venture).

The analysis of the figure 3 representing CAAR associated with each of these four an-nouncements clearly shows the existence, with regard to Danone, of a “stock market expe-rience effect” in the management of international (particularly Chinese) alliances. Startingfrom an initial situation of marked stock market depreciation, Danone showed constantprogression from these abnormal returns on each new announcement. This progression isconstant, but also strong. As regards CAAR (during the period [−10, +10]), there is dif-ference of almost 8% between the first announcement and the last. The importance of thisexperience effect suggest that, above and beyond the value attributed to Danone’s repeatedexperience of such alliances, the stock market valued what it saw as Danone’s develop-ment of a capacity to successfully manage international alliances. The stock market thusconsidered that Danone’s Chinese joint ventures had greater chances of success becausethis company “possessed” an organisational learning capacity—or, in any case, showedsigns that it had this capacity—that enabled it to learn the relevant lessons and managerialpractices through its many experiences of joint ventures in China.

-8%

-6%

-4%

-2%

0%

2%

4%

6%

1 3 5 7 9 11 13 15 17 19 21

CAAR Danone 01/94

CAAR Danone 07/94

CAAR Danone 05/95

CAAR Danone 04/96

Figure 3. Danone CAARs over different periods.

110 MESCHI AND HUBLER

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Pierre-Xavier Meschi is Professor in international business and strategic management at the Faculte des SciencesEconomiques et de Gestion (Universite de la Mediterranee, Aix-Marseille II) and at the Marseille-ProvenceBusiness School. He received his PhD in business administration from the Institut d’Administration des Entreprises(Universite Aix-Marseille III). His research focuses on international alliances and acquisitions.

Jerome Hubler is Senior Lecturer of finance at the Institut d’Administration des Entreprises (Universite deNancy II, France). His research focuses on event studies, especially their methodological aspects.