Organizational Justice in International Joint Ventures

Contents

1 Introduction

2 Organizational Justice Theory
2.1 Fairness as a determinant for actions & decisions
2.2 Forms of Organizational Justice
2.2.1 Distributive Justice
2.2.2 Procedural Justice
2.2.3 Interactional Justice
2.2.4 Distinctions and Interrelationships

3 International Joint Ventures
3.1 Definition and Characteristics
3.2 Benefits of International Joint Ventures
3.3 Challenges of International Joint Ventures

4 Organizational Justice in International Joint Ventures
4.1 Organizational Factors
4.1.1 Distributive Justice & Equity Logic
4.1.2 Procedural Justice & Instrumentality Logic
4.1.3 Interactional Justice & Social Exchange Logic .
4.1.4 Interaction effects
4.2 Cross-cultural Factors
4.2.1 Dimensions of Culture
4.2.2 Multilevel Justice & Multilevel Culture

5 Discussion
5.1 Theoretical contributions
5.2 Managerial implications
5.3 Limitations

6 Conclusion

Bibliography

Appendix

List of Figures

1.1 “Now climb that tree” - Different Fairness Perceptions

2.1 Dimensionality of Organizational Justice

4.1 A Theoretical Model of Justice and Performance in Strategic Alliances

Abstract

This thesis explores the significance of organizational justice in interna- tional joint ventures (IJV), from an organizational as well as a cultural perspective. The majority of studies on organizational justice were con- ducted within organizations and in a mono-cultural context. However, in the face of increasing globalization and growing popularity of IJV activi- ties, the study of fairness in a cross-cultural context becomes more and more important. Therefore, this thesis seeks to bring organizational jus- tice into relation with culture by using an IJV context, and serve as a starting point for further research in this area. The three dimensions of justice, distributive, procedural, and interactional justice, positively affect IJV performance through their distinct and interactive effects. In this set- ting, culture has a moderating influence on justice perceptions, which can be assessed though bringing justice perspectives together with Hofstede’s cultural dimensions. Effects on fairness perceptions in different cultures can be outlined and contrasted. On this basis, implications for theoretical discussion and managerial practice in cross-cultural joint ventures can be derived. Together with further research, managers could use these findings to develop transcultural justice competencies.

Chapter 1 Introduction

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Figure 1.1: “Now climb that tree” - Different Fairness Perceptions (Russell, 2012)

To decide which of the new job applicants is the right one for the job vacancy, the human resource manager in figure 1.1 gives everyone the same task to fulfil. Without regard to the personal qualities of the dog, seal, fish, elephant, penguin, monkey and bird, he decides that everyone of them should climb that tree and compete against each other. From his perspective this might be a fair procedure, as he doesn’t make exceptions and treats everyone equally. The monkey and bird might also be fine with the task and might not care about an unfair competition. The elephant and fish, however, are very likely to perceive the situation as unjust and might voice complaints against the human resource manager. As this example shows, fairness often lies in the eye of the beholder and depends on everyone’s individual perspective. Being treated fairly or unfairly according to one’s perception, does have an impact on attitudes as well as behaviours. Organizational studies refer to this concept with the term Organizational Justice. Organizational Justice deals with people’s perceptions of fairness at the workplace. Workers are concerned about being treated fairly by their supervisors; managers are interested in being treated fairly by shareholders and the other way round. This makes fairness an issue that we need to face in everyday interactions at the workplace. However, it is important to notice, that when we talk about justice or fairness, which will be used synonymously throughout this thesis, we always mean perceived justice and perceived fairness of individuals. It will never be discussed whether situations or behaviours are per se just or fair. As seen in the above picture the focus of interest shall lie on people’s subjective perceptions of justice and how they interact with each other. Throughout the history of organizational justice research, scholars discussed different fields of interactions in which justice matters (Colquitt, 2001). People care about the outcomes they receive (Homans, 1961; Adams, 1965), the process through which these outcomes are allocated (Thibaut & Walker, 1975; Lind & Tyler, 1988) and the interpersonal treatment along the way (Bies & Moag, 1986). Researchers managed to link justice perceptions to job attitudes (Folger & Konovsky, 1989), such as commitments (McFarlin & Sweeney, 1992; Rahman et al., 2016), citizenship behaviour (Moorman & Byrne, 2005), trust (Brockner & Wiesenfeld, 1996; Lewicki et al., 2005) and outcome favourability (Brockner, 2010) among others.

In recent years, the study on organizational justice has proliferated. In the face of globalization and multiculturalism, scholars started to work on justice in inter-firm cooperation, such as strategic alliances and international joint ventures (IJV) (Kim & Mauborgne, 1991, 1993; Johnson et al., 2002; Inkpen & Currall, 2004; Luo, 2007a, 2008, 2009; Robson & Bello, 2008; Ariño & Ring, 2010). Newer research studies connected the concept of culture with justice, as fairness perceptions are likely to be different across cultures (Leung, 2005; Beugré, 2008; James, 2015). In the context of accelerating world trade and cooperation of firms from different countries through IJVs, the question of how to assure fairness within a cultural distinct international organization with diverse parties becomes more and more complex. This thesis wants therefore to connect the rather new topics, justice in IJVs and the cross-cultural aspects of justice. This will then open a new perspective on the appearance of justice which can initiate further research and encourage a scientific debate of huge importance. The main questions that shall be addressed are: What is the role of organizational justice in IJVs? How does culture impact perceptions of organizational justice? What implications can be derived for managing an IJV? In order to bring these two fields into relation, this thesis shall first outline the basic cornerstones of the organizational justice theory, including the role of fairness regarding actions, decisions, and the dimensions of justice. Afterwards the focus will shift to the construct IJV and discuss its characteristics, benefits and challenges. Chapter 4 will bring the two topics of interest together and discuss the scope of organizational justice in IJVs. First with focus on the organizational factors and then with a sight on the cross-cultural factors. The importance of organizational justice for cross-cultural JVs shall be highlighted at the end with theoretical contributions as well as practical implications.

Chapter 2 Organizational Justice Theory

The notion of justice has been an increasingly discussed topic in scientific discourse over the last four and a half decades. Organizational justice research is present in many disciplines and in a wide range of contexts. Not only organizational researchers, but also scientists in fields like psychology, politics, law and culture, have worked on organiza- tional justice. Talking about the first scientific considerations of justice probably leads back to Aristotle, who analysed the fairness of resource distribution between individuals (Ross, 1925). Later on fairness of distribution concerns (Homans, 1961), fairness in decision-making (Thibaut & Walker, 1975) and interpersonal behaviour (Bies & Moag, 1986) found entrance to organizational justice research. Before going into detail about the dimensionality of fairness, the phenomenon, of why fairness matters, will be shown in a new light.

2.1 Fairness as a determinant for actions & decisions

Why do people actually care about justice? There are various theories trying to ex- plain how justice influences people’s behaviours and minds (Blader & Tyler, 2005). Certainly, perceived fairness has different reasons under different circumstances for people’s individual reactions towards injustice. However, according to Colquitt and Grennberg (2001), there are three fundamental reasons why people care about justice.

Firstly, people seek to protect and enhance their long-term economic interest. The instrumental perspective of justice sees fairness as a means for individuals to persuade their self-interest. Secondly, people care about justice because it helps them to measure how far they are valued by the group of people they belong to. Scholars refer to this as relational perspective. Here, individuals are concerned with fair treatment because they see themselves in relation to others within a social collective. Thirdly, people value justice because of their moral instincts. The drive to respect moral virtues reflects the moral perspective of justice (Folger, 1998). Building up on Kelman (1958), Cropanzano, Rupp, Mohler and Schminke (2001) define these three elements as “three aspects of being human: we seek to maximize gains and minimize losses (compliance), pursue close interpersonal relationships (identification), and accept important values (internal- ization)” (Cropanzano et al., 2001, p. 8). These reasons are called the three roads to organizational justice. However, more recently scholars draw their attention to uncer- tainty as a reason for people caring about justice. Individuals have the need for certainty and predictability and justice can provide them with information that can reduce these uncertainties (Lind & van den Bos, 2002). The uncertainty management perspective makes justice an efficient tool to manage uncertainties.

This implies that we can not only see people as recipients of behaviours, we must also see them as actors towards others. Therefore, self-interested pursuit of fairness is not opposed to fair relationships and others’ interests, it serves one’s own interests as well as the interest of others (Gillepsie & Greenberg, 2005). Fairness plays a huge role in inter-human relations and can influence one’s actions and decisions. There has been scientific evidence that fairness perceptions have an impact on attitudes and behaviours, such as organizational commitment, citizenship behaviour, trust or task performance (Folger & Konovsky, 1989; Colquitt et al., 2001; Lewicki et al., 2005; Rahman et al., 2016). However, justice not only works on the individual level, but is also an example of fairness perceptions of an employee towards his supervisor, on the organizational level and the fairness perception of an employee towards the entire organization (Blader & Tyler, 2003; Beugré & Baron, 2001). Thus, organizational justice is relevant from an individual as well as from an organizational perspective, as perceived fairness can stimulate employees behaviour. As “employees care about justice, and it shapes their thoughts, feelings, and behaviors in groups and organizations” (Blader & Tyler, 2005, p. 351), organizational justice can be seen as an important moderator for an organization’s performance.

Organizational justice has an impact within an organization, but also influences the concerns of the exterior environment, such as customers, competitors or an allied organization (Clemmer, 1993; Ariño & Ring, 2010). Recent studies have focused on the significance of organizational justice in the field of strategic alliances and IJVs, which shall be discussed later on in this thesis.

2.2 Forms of Organizational Justice

Organizational justice can be differentiated into certain dimensions. To assess fairness di- mensions there can be distinguished between a reactive and a proactive theory of justice (Greenberg, 1987). The reactive theories mainly focus on people’s reactions to unfair states, whereas the proactive theories examine behaviours designed to promote justice. This thesis will mainly discuss reactive theories of justice. Throughout the years of research, scientists have found that organizational justice in the first instance can be divided into three dimensions. It can be differentiated between a more outcome-related form of fairness (distributive justice), a more process-related form of fairness (procedural justice) and a justice form that can be found in interactions (interactional justice). Researchers’ opinions about this distinction, however, differ and there has been some discussion about the dimensionality of organizational justice which shall be outlined in 2.2.4.

2.2.1 Distributive Justice

The first ideas about organizational justice starts with concerns about unfair distributions. Employees care about fair distributions of pay, rewards or promotions. Organizational resources are limited and people want to have a fair share when these resources are distributed. Homans (1961) first shaped this concept when he wrote: “A man [...] will expect that the rewards of each man will be proportional to his costs [...] and that the net rewards, or profits, of each man will be proportional to his investments” (Homans, 1961, p. 75). He named this principle distributive justice and connected it with perceptions of outcome fairness. A few years later Adams (1965) used these achievements to build up his widely absorbed equity theory which states that based on their input people expect to get a fair output. The difficulty thereby is to determine which output can be seen as “fair”. Therefore, a worker would compare his ratio of input-output to the ratio of a similar co-worker. A fair state arises when the two ratios are equal. The equity rule is fulfilled when “rewards and resources be distributed in accordance with recipients’ contributions” (Leventhal, 1976, p. 94). If this is not the case, a state of distributive injustice occurs. If outcome is less than investment, people feel anger. To the contrary, if ones profit is higher than his input, one would feel guilt (Adams, 1965). These negative emotional states were found to motivate behavioural/cognitive changes, for example, a worker who gets under-rewarded would react by working less or complaining, whereas a worker who gets over-rewarded tends to explain that the greater output was somehow deserved (Walster et al., 1978). Subsequently, Greenberg (1982) found that, in general, underpaid workers are less productive and less satisfied than equitably paid workers and, overpaid workers are more productive, but also less satisfied than equitably paid workers. Despite the broad popularity of equity theory there were also certain drawbacks. Leventhal (1976, 1980) argued that people are not necessarily following the equity norm as an allocation method because it undermines interpersonal cooperation and social relations. Also Deutsch (1975) criticised that in the face of solidarity, welfare, and harmony, a need-based allocation of resources could as well be perceived as distributive just. Insofar, distributive justice would not only arise through equity, an equal input-output ratio, but also through equality, by dividing rewards equally. Thus, Leventhal and Deutsch showed that there is more than one possible fair allocation norm and over the years researchers found that situations are governed by multiple allocation norms (Reis, 1986). Despite these improvements, the concept of distributive justice only focuses on the out- comes of an allocation process. Starting in the mid-seventies, interests of organizational justice started to shift to more process-oriented concerns.

2.2.2 Procedural Justice

Distributional justice theorists have solely focused on the fairness of outcomes and distributions. Thibaut & Walker (1975), however, raised attention to the fairness of the allocation process, precisely the process used to make a decision. People may not only care about the outcome they receive, they may also care about the methods or means of how their outcome was allocated. Thibaut & Walker (1975) took a courtroom trial example to illustrate the separate perception of procedural justice. In the adversary court system (used in the U. S. and Great Britain) a judge is responsible for a fair procedure of conducting the trial, whereas a jury is responsible for deciding the verdict. Thibaut & Walker (1975) found that procedures are perceived to be most fair when people do have an opportunity to take part in the process of deriving the outcome. According to the process-control model, the more process control¹ one has over the decision-making process, e. g. by voicing opinions, facts and needs, the fairer one will perceive the process (Thibaut & Walker, 1975). Even if the defendant perceives the jury’s verdict or the outcome of the trial as unfair, he can still find the judge’s conduct of the trial and the process used to derive the outcome as fair. It has been proved that giving disputants voice in the decision-making process tend to enhance the outcome acceptance, even in case of unfavourable decisions (Lind et al., 1980). Subsequently, there can be found a difference in the perception of fair outcome, distributive justice, and fair decision-making process, procedural justice (Thibaut & Walker, 1975; Lind & Tyler, 1988).

Later on the concept of procedural justice also found entrance to organizational studies. The importance of relationships and associations with authorities was stressed. Trustworthy authorities are expected to use neutral decision-making procedures so that all employees will benefit fairly from being a member of the organization (Tyler, 1989). Scholars started to assess the effects of procedural justice on job satisfaction, job performance, trust, compliance with organizational rules and other key outcomes (Lind & Tyler, 1988). It can be considered as “an important goal of process-oriented theorists [...] to show how decisions are planned and implemented[. This can] explain people’s justice judgements and related attitudes and behaviors” (Brockner, 2010, p. 2).

2.2.3 Interactional Justice

After the introduction of distributive justice and procedural justice to the scientific world, Bies & Moag (1986) criticized that interpersonal communication as an important part of the enactment of a decision has been neglected, which they found “surprising since the enactment of a decision-making procedure necessarily requires some form of communication” (Bies & Moag, 1986, p. 46). They demanded a distinction between the procedure and its enactment since “every aspect of an organizational decision (procedure, interaction, outcome) may create a potential justice episode” (Bies & Moag, 1986, p. 46). Therefore, the concept of interactional justice was introduced, which should assess the quality of interpersonal treatment during the enactment of organizational procedures (Bies & Moag, 1986). Research has shown that, for example, job candidates who didn’t get the job were more likely to accept the refusal as fair when they received a reasonable explanation regarding the election procedure (Bies & Shapiro, 1988). It also has been proved that apologies and sensitivity can make people feel better about negative outcomes (Bies, 1987; Greenberg, 1993b). In organizations, employees are concerned about interpersonal treatment at the workplace. Therefore, there is no doubt that criteria of communication also matter to organizational justice research. But, scientists are at odds with each other about how to integrate this aspect of justice into the overall model.

2.2.4 Distinctions and Interrelationships

Over the years a lot of organizational justice literature has been accumulated and the need for an overall taxonomy of organizational justice theories was given. The validity of distributive justice and procedural justice was unquestioned. However, scientists didn’t agree on whether interactional justice really deserved to be a new distinct entity or whether it can be seen as an interpersonal part of procedural justice.

That is why many researchers assessed criteria like appearance of neutrality, timely use of feedback or treatment with dignity and respect, but didn’t use the interactional justice label (Greenberg et al., 1991). Despite the similarities of interpersonal treatment and formal decision processes, Bies (2001) emphasized that formal procedures as well as communication criteria are related separately to work outcome. Furthermore, Greenberg (1993a) argued that the classification of interactional justice is confusing, because the distinction between procedures and outcomes has only been applied to the structural but not to the social side of justice. He states that “interactional justice may be legitimately recognized as a part of procedural justice[, but] [...] it is also sometimes separated from procedural concerns, and an aspect of distributive justice”

(Greenberg, 1993a, p. 82). Subsequently, Greenberg (1993a) suggests a separation of interactional justice into informational justice and interpersonal justice. Informational justice refers to open sharing of information about procedures and thereby demonstrates regard for people’s concerns and fair treatment. Interpersonal justice refers to treating people with respect and dignity and “showing concern for individuals regarding the distributive outcomes they received” (Greenberg, 1993a, p. 85). Colquitt (2001) supported the separation of interactional justice and created a four-factor-model of organizational justice. Bies (2005) stated that interactional justice should always be measured separately from procedural justice and that interactional justice can and should indeed be measured separately as interpersonal and informational justice. A rather new method is, by promoting a holistic justice view, to measure overall justice in studies. Although this method omits the problem of distinction, drawbacks are limited in scope and comprehensiveness (Colquitt, Greenberg & Scott, 2005). Thus, assessing the dimensionality of organizational justice is necessary and as differential effects of justice dimensions are evident (see Ambrose & Arnaud, 2005) the generally adopted three- factor model (see figure 2.1) shall be used in this thesis.

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Figure 2.1: Dimensionality of Organizational Justice

Chapter 3 International Joint Ventures

In recent years international operations have become more and more important in the business world. IJVs are a very common tool for growing businesses to enter foreign markets. Despite the many opportunities such a strategic relationship offers, a lot of risks endanger successful operations. Organizational justice can be seen as an important asset affecting the performance of IJVs. Before going into detail about organizational justice in this special field, this chapter introduces basic characteristics, benefits and challenges of IJVs.

3.1 Definition and Characteristics

A JV is one of the most popular forms of strategic relationships. It can be considered as a separate business entity that allows at least two separate companies to collaborate and follow specific common goals. It is a business arrangement with the aim to undertake transactions for the gain of all parties or to create profits that are shared mutually. JVs are the most complex type of arrangement, because unlike contractual relationships as franchising or licensing, “they involve shared equity or joint capital investment” and unlike mergers and acquisitions, they are “new organization[s] existing in parallel to the [participating] firms [and thus,] [...] represent a longer-term collaborative strategy” (Yan & Luo, 2015, p. 3). There are five main characteristics of a JV: Contractual arrangement, specific limited purpose and duration, joint property interest, common financial and intangible goals and objectives as well as shared profits, losses, management and control (Gutterman, 2009). Naturally, two parties will agree to form a separate business entity and make various contributions of tangible and intangible assets. The number of shares generally determines the rights of the parties. An IJV “involve[s] two or more legally distinct organizations (the parents), each of which actively participates in the decision making activities of the jointly owned entity [...] [with] at least one parent organization [...] headquartered outside the JV’s country of operation” (Geringer & Hébert, 1989, p. 235). IJVs became increasingly popular after the end of the second world war and the beginning of globalization. U.S. and European organizations collaborated for post-war rebuilding activities and British multinationals started to joint venture in less developed countries, mainly to spread risk and tap into local resources (Reus & Ritchie, 2004). Companies have different intentions for building up an IJV. One reason might be to manufacture and produce goods. Therefore, one party may contribute technology and know-how, whereas the other party could offer facilities, equipment and personnel.

Another reason might be to promote marketing and distribution, as a party may want to sell goods and services in a geographically distant region. The local IJV partner can provide access to marketing channels and assistance with expertise. Additionally, research and development JVs are also common as the combination of two entities’ creative resources and assets might facilitate innovative outcomes (Gutterman, 2009). There are several advantages and benefits in utilizing an IJV for the mentioned functions, which will be presented in the upcoming section.

3.2 Benefits of International Joint Ventures

IJVs are very popular because they offer a lot of benefits at reasonable cost. The foreign party that ventures into an other country than its own gets, through the JV, access to the foreign market at comparatively low costs, because the local partner contributes working capital, facilities and distribution channels. Additionally, the foreign partner gets access to the local management, which knows the market of his home country and can offer knowledge of local tastes, customs and marketing strategies. A common problem when entering a foreign market is unfavourable treatment by the local government.

When venturing with a local partner, different governmental rules apply and favourable treatment can be obtained. This is especially important in emerging and centralized economies (Gutterman, 2009). The incentives of the local party to engage in an IJV can vary. A smaller local partner might want to create more jobs and seek for growth opportunities. The acquisitions of the foreign partner’s technical know-how and management skills might also play a role. Particularly in emerging countries, local firms often see IJVs as an opportunity to gain some technical or managerial knowledge of the more advanced partner. Furthermore, the local partner might expect to get access to the foreign company’s own market network and thereby exploit sales and distribution. Certainly, cost reduction and capital raising are key incentives, particularly for smaller firms in emerging economies (Gutterman, 2009).

Apart from parent companies’ separate interests, there are also mutual benefits both parties can draw on. First, parent companies can share financial resources and thereby the amount of capital contributed can be reduced. Second, the parties can share the business risk as they share the costs (compared to a wholly owned subsidiary) and risk can be reduced through the expert knowledge of the local partner. Third, an IJV offers the opportunity to achieve beneficial economies of scale and transactional benefits because costs for logistics, production and market entry are lower due to the local partner’s expertise. Fourth, parents can combine their competitive strengths, e.g. technical and managerial knowledge and thus, improve market power and innovation. Nevertheless, IJVs are subject to certain risks and difficulties which will be reviewed in chapter 3.3.

3.3 Challenges of International Joint Ventures

The number of IJVs has grown over the years, but the probability of failure remains high. Previous studies have proved that the failure rate of JVs is about 30 % in developed countries (Killing, 1983) and up to 50 % in developing economies (Reynolds, 1984). As each IJV is certainly unique, it is thus, difficult to generalize the reasons for failure; however, there are common pitfalls that can be avoided. Problems affecting the IJV are often caused by insufficient pre-formation planning. Before the IJV starts to operate it is important to analyse the target country’s market and assess competitive factors and product demand. Furthermore, one should be aware of possible communication failures, due to language, cultural or geographic barriers, and be clear about the fundamental objectives of the JV. Common problems that occur during the operation of the IJV can be poor financial performance, caused by e.g. poor sales, management problems or strategy problems. One of the biggest challenges for IJVs is often effective and flexible management. Due to diverse cultural and educational backgrounds of managers, coordination can be difficult, which leads to inflexibility, slow reactions to unanticipated changes and strategical inconsistency. Particularly those parents with little experience insist on a shared management structure (Gutterman, 2009). Strategy problems are also frequent. Parents often fail in anticipating problems, adapting their strategy to changing market conditions or grabbing new opportunities. Personnel problems are common and may arise from difficult working conditions, poor training or cultural differences.

An IJV involves multiple inter-organizational relationships, which can be very dif- ficult to manage: the relationship between the parent firms, the relationship between the JV’s top management team and each parent, and the relationships between the IJV’s managers. Naturally, the relationship between the parent companies themselves most often causes IJVs to fail (Yan & Luo, 2015). Particularly parents who follow different business objectives can conflict with each other or the operation of the IJV.

Examples include opportunistic behaviour, interests outside the IJV, and loss of interest. Reasons for different objectives might be that the parties have divergent backgrounds, strategic expectations, organizational structures and processes, as standards in devel- oped countries differ from standards in emerging economies. This can also lead to a lack of mutual trust between the parties and even further lead to inter-parent con- flict. Another factor that needs to be considered in IJVs is cultural difference, because it can “lead to misunderstandings in negotiation processes and ambiguity about par- ents’ goals” (Reus & Ritchie, 2004, p. 383). Overcoming cultural distance seems to be more and more important in the face of globalization. Therefore, parents should emphasize factors that can reduce the negative effects of cultural differences, as for example organizational justice (see chapter 4.2). Other factors influencing IJV’s success or failure are environmental-related. Political disadvantages or lack of infrastructure can cause inefficiency and instability. Governmental regulatory conditions, such as national tax laws or environmental obligations, can be sources of conflict and minder profitability.

Although IJVs are a common and highly beneficial form of alliance, through men- tioned challenges and difficulties the risk of failure remains high. Therefore, it is crucial to reinforce success. How organizational justice can be helpful in that matter will be outlined in the next chapter.

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¹ Thibaut & Walker (1975) distinguish between the ability to control the verdict or judgement in an adjudication, decision control, and the ability to control the presentation of evidence and arguments, process control. These two types of control were later on translated to the organizational studies by Greenberg and Folger (1983) as choice and voice.