Managing Functional Diversity to Improve the Performance of International Joint Ventures.

International Joint Ventures (IJVs) have become one of the most important ways for

companies to expand their activities and exploit business opportunities abroad. In China,

for example, which has become the world’s largest recipient of Foreign Direct Investment,

IJVs with local companies are the most important way of doing business. However, many

companies have learnt that the performance of their joint ventures in China does not meet

their expectations. This study focuses on functional diversity - differences in business

practices between foreign and local companies - and its influence on IJV performance. We

investigate the influence of this functional diversity on the performance of IJVs and discuss

how companies can moderate this influence through adaptation, trust, commitment and

communication. Hypotheses are formulated and empirically tested using data gathered

through a questionnaire survey of managers of German-Chinese IJVs. The results show that

although functional diversity has a negative impact on IJV performance, managers can

influence the magnitude of this impact. We use insights from interviews with managers of

German-Chinese IJVs in China to supplement our discussion and provide some indication

of best practice.